Contracts, Licenses and Bonds for an Accounting and Tax Firm

Most of what an accounting or tax firm depends on cannot be bought with the business: the Internal Revenue Service (IRS) e-file number cannot be sold, and certified public accountant (CPA), enrolled agent and preparer credentials belong to people. Some documents carry insurance requirements, mainly the lease and, for some clients, engagement contracts. This guide is for the buyer who wants to know what to reapply for, what to check and which endorsements a contract may ask for.

Which licenses and IDs transfer when I buy the firm, and which do not?

The table lists what a practice typically holds, who owns it and what a buyer should do. It describes general federal rules and a few state examples. Confirm the list for your own state and entity with your attorney, accountant and the agencies involved.

On the federal e-file side, the IRS rules work like this:

• An IRS e-file provider must update its application within 30 days of a change in principals or responsible officials.
• It must notify the IRS within 30 days if it sells or transfers the e-file business.
• Approval of a new application can take up to 45 days and may involve a credit check, a tax compliance check and a criminal background check.
• Principals and responsible officials must be fingerprinted unless they are on the IRS exempt list, which includes attorneys, CPAs with a current license and enrolled agents. Licensed public accountants who are not CPAs must be fingerprinted.
• The IRS materials do not clearly say whether a stock purchase that keeps the same legal entity needs only an update rather than a new number, so ask the IRS e-help desk (the IRS e-file support line) before closing.
• If the sale closes during filing season, the IRS says to contact it before the transfer so the change goes smoothly.

Start the application early either way. The licenses, permits and registrations guide covers the general sale process.

On credentials, only CPAs, attorneys and enrolled agents have unlimited rights to represent clients before the IRS. A preparer in the Annual Filing Season Program can represent only clients whose returns the preparer prepared and signed. If the selling owner is the only credentialed person and plans to leave, the firm's ability to sign and represent can change on closing day.

Which bonds apply to an accounting or tax firm?

It depends on the state and the activity. A bond is not insurance for the firm: a surety backs the firm's obligation to a third party and expects the principal to repay any claim it pays. California is the clearest example tied to tax preparation. California requires non-exempt paid tax preparers to register with the California Tax Education Council (CTEC), which includes a 60 hour qualifying course, a PTIN, fingerprinting and a $5,000 tax preparer surety bond. Certain credentialed professionals are exempt, so ask CTEC whether your staff are covered. Oregon requires paid preparers of Oregon personal income tax returns to be licensed or registered through its Board of Tax Practitioners, subject to exemptions you should confirm with the board. If you prepare Oregon returns, ask the board whether a bond applies.

A fidelity bond can arise for a different reason. If the firm sponsors an employee benefit plan, the Employee Retirement Income Security Act (ERISA) generally requires plan officials who handle plan funds to be bonded, so ask your benefits counsel or plan administrator. The phrase fidelity bond is also used for employee theft coverage, which a commercial crime policy can provide (the International Risk Management Institute (IRMI) treats the terms as synonyms). Do not assume that accounting firms in general must carry a bond, or that a bond transfers to a buyer. See whether surety and license bonds transfer and the surety bonds page.

What insurance do client contracts, leases and lenders ask for?

Most clients are individuals and small businesses, who may not ask a firm for a certificate. A larger practice that serves nonprofits, lenders or government bodies may see insurance clauses in engagement or audit contracts. How often they appear, and at what limits, varies, so pull every engagement letter that mentions insurance and note the limit. Leases often include insurance clauses too: general liability, additional insured status, a waiver of subrogation and certificates at renewal.

An additional insured is a party the policy does not cover automatically but that the named insured adds, usually because a contract requires it. A waiver of subrogation means the insurer gives up the right to recover from a liable third party, and a waiver given before a loss generally does not bar coverage.

A hypothetical example. A new owner of a ten-person tax practice leases a suite in a shared office building. The property manager says the seller's certificate shows the landlord only as a certificate holder, while the lease asks for additional insured status and a waiver of subrogation. The new owner learns that a certificate is not the policy and that the fix is an endorsement on the policy itself. Whether the carrier will add it depends on the policy and underwriting.

Read lease insurance requirements for new owners, certificates the seller issued and why a certificate is not coverage.

What happens to client files and engagement letters at a sale?

Client files do not move automatically. Ask deal counsel before you rely on the client list. Under the Treasury rules on return information:

• You may transfer a taxpayer list (names, addresses, phone numbers, entity type and return form number) in conjunction with the sale of the business.
• Due diligence needs a written confidentiality agreement.
• Sharing anything else about a return generally needs the client's written consent, given before the disclosure. If no duration is stated, it lasts one year.
• Unauthorized disclosure can bring penalties under the Internal Revenue Code.

Records are also a continuing duty. An e-file originator must keep signed signature authorization forms for three years from the later of the return due date or the date the IRS received the return. That rule covers those forms only. Professional standards, state rules and your engagement terms may require keeping client files longer, so ask counsel and your state board.

Engagement letters sit between the client and the firm that signed them, so in an asset purchase ask counsel whether to assign them or to issue new ones. Software, hosting and payroll platform licenses may not assign automatically, and the Safeguards Rule expects the firm to keep contracts with service providers that require them to protect customer data, so ask counsel and each vendor what happens at your closing. A buyer who files next year's return for a client the seller served is continuing the seller's work, which is why the core coverage guide starts with professional liability and the retroactive date.

Which contract and license tasks should I finish first?

1. List every license, identifier and registration the firm uses, and who personally holds each.
2. Start the e-file application or update, and confirm with the IRS e-help desk how your structure is treated.
3. Confirm that every preparer who will sign returns holds a valid PTIN and the credential the work requires.
4. Ask the state board of accountancy and any state tax preparer registrar what they need after a sale.
5. Collect the lease, engagement letters that carry insurance clauses, software contracts, loan terms and any franchise agreement. Mark each insurance requirement.
6. Ask the broker to match each requirement to an endorsement, and to request updated certificates only after the endorsements exist.
7. Ask counsel how client files and consents will be handled.

The check customer contracts against your policies guide shows how to run steps five and six. If you send Morrow the lease and any engagement letters with insurance clauses, it can review them against your policies, flag gaps and request quotes. A request is not coverage until a carrier binds it.

Keep reading

• Just Bought an Accounting and Tax Firm? What Insurance Do You Need?
• Coverage Gaps New Owners of Accounting and Tax Firms Find
• Licenses, Permits and Registrations When Buying a Business
• Lease Insurance Requirements Most New Owners Have Never Read
• Do Surety and License Bonds Transfer When You Buy a Business?
• All guides for new business owners

Frequently asked questions

Does the seller's IRS e-file number transfer when I buy the practice?

No. The IRS says an e-file number cannot be sold or transferred, and an asset buyer must apply for a new one with proof of the sale. Whether a stock purchase that keeps the same entity needs only an update should be confirmed with the IRS e-help desk.

Do I need a surety bond to prepare tax returns?

Not everywhere. California requires non-exempt registered tax preparers to carry a $5,000 surety bond. Other states and federal rules differ, so check your state agencies. Do not assume every accounting firm needs a bond.

Will my landlord accept the certificate the seller gave?

Maybe not. Leases often ask for specific wording, such as additional insured status and a waiver of subrogation, and a certificate is not the policy. Compare the lease with the policy endorsement and ask the broker to fix any mismatch.

Can I take over the seller's client list in an asset purchase?

Treasury rules allow a taxpayer list to be transferred with the sale of the business, but other return information follows written consent rules. Ask deal counsel how to handle files and consents before you close.

Is the selling owner's CPA license part of what I bought?

No. A CPA license belongs to the individual. If the seller stays on for a transition, check how long and what the state requires, and confirm who signs returns and attest work once they leave.

References

• IRS: PTIN requirements for tax return preparers
• IRS: Become an Authorized E-file Provider
• IRS Publication 3112: IRS e-file Application and Participation
• IRS Publication 1345: Handbook for Authorized IRS e-file Providers
• IRS: Annual Filing Season Program
• IRS: Enrolled Agent Information
• NASBA: Firm Licensure
• CTEC: Become a CTEC Registered Tax Preparer
• Oregon Board of Tax Practitioners
• 26 CFR 301.7216-2: Permissible disclosures or uses (Cornell LII)
• 26 CFR 301.7216-3: Disclosure or use only pursuant to consent (Cornell LII)
• IRS Publication 5708: Creating a Written Information Security Plan for Your Tax and Accounting Practice
• IRMI: Additional Insured
• IRMI: Waiver of Subrogation
• IRMI: Employee Dishonesty Coverage
• U.S. Department of Labor: Field Assistance Bulletin 2008-04 (ERISA section 412 bonding)

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.