How to write a CPA disengagement letter and return client records

Circular 230 is the Treasury rulebook for practice before the IRS. Section 10.28 is return of client records. The Office of Professional Responsibility enforces Circular 230. AICPA members also follow the AICPA Code of Professional Conduct, including the Records Requests interpretation (ET sec. 1.400.200) under the Acts Discreditable Rule. Your state board may be stricter on what you can withhold when fees are unpaid. Your malpractice carrier will care how you timed the letter and what you kept. (Circular 230 PDF, Office of Professional Responsibility and Circular 230, AICPA Records Requests interpretation (ET sec. 1.400.200))

Do not treat the outline below as your firm's letter. Have counsel and your carrier read it. Check the board in every state where you are licensed.

Decide in writing, with an owner name on the decision. Do not fire people in Slack in April. The clean window for a 1040 firm is after October 15 and before you send organizers and W-2 questionnaires in December and January. If you wait until January, you are still their preparer on the days the IRS and SSA care about.

• Unpaid invoices past the terms in the engagement, after you have billed and reminded in writing.
• Work you do not offer (a notice, a sale, a payroll system) that they keep handing you anyway.
• Files that miss every document date in your letter, after the chase sequence you already published.
• Risk you cannot staff: a year you are not competent to sign, a related party you cannot be independent on, a client who wants a position you will not take.

Capacity is a reason. Personality is not a reason you put in the letter. The letter states the end date and the handoff, not a review of their character.

Section 10.28 says a practitioner must, at the client's request, promptly return any and all records of the client that are necessary for the client to comply with federal tax obligations. You may keep copies. A fee dispute generally does not relieve you of that duty. If state law allows you to retain records when fees are unpaid, you need only return the records that must be attached to the taxpayer's return, and you must still give reasonable access to review and copy the rest of those client records that they need for federal tax obligations. (Circular 230 PDF, section 10.28)

Records of the client, as 10.28 defines them, include documents or materials provided to you, or obtained by you in the course of the work, that existed before they hired you; materials the client or a third party prepared (not your employee or agent) and gave you for the matter; and any return, claim for refund, schedule, affidavit, appraisal, or other document you already presented to them that they need for current federal tax obligations. The term does not include a return or similar document you prepared if you are holding it because they have not paid the fee for that document. (Circular 230 PDF, section 10.28)

That last sentence is where firms get hurt. Do not withhold last year's source documents they gave you because this year's invoice is open. Do not invent a lien on their bank statements. Do check state board rules and AICPA ET sec. 1.400.200 before you withhold a work product you prepared. Then do what those rules actually say, not what would feel fair.

Counsel and your carrier go first. Brackets are yours. This is not a form letter from AICPA or the IRS.

Do not ghost them. A quiet disappearance is how you still look like their representative when a CP2000 shows up. Send the letter, return the records, close the door.

Download the disengagement offboarding checklist. One row per departing client. Fill dates from the letter and the export log.

Remaining clients still need organizers and documents. The tax season operator drafts those chases. Your staff still approve what goes out. Your CPA still reviews and signs every return.