its always scary to think that someone you trust may be a danger to your child. Of course you must err on the side of protecting your little one's safety, but that does not mean you have to destroy what is evidently a loving relationship between your wife and her father (at least I imagine so since you did not state otherwise) and a boy and his grandparents.
Clearly the individual making the accusation has some troubles. The research on how well we remember events from childhood is not conclusive. It can be very difficult for people to determine if a memory is 'true' or not. Sometimes people do remember things later in life, but again, what they remember may not accurately reflect what actually happened. So it is likely that you will never know the truth about what the accuser said.
You have a couple of choices, and it is probably what your wife's instinct says that you should pay the closest attention to in this case. You could sever all ties with this little one's grandparents, though I do not think this would be your best choice if he is closely attached to them (and it would be quite a loss for you and your wife as well). Alternately, you could dismiss the man's accusations as false and carry on as usual. I think you may want to come to some middle ground in this matter, if that is what feels right to you.
Acts of sexual abuse within families are typically crimes of opportunity. They happen when someone has unsupervised access to a child in an environment where they are unlikely to be disturbed. If you can limit your son's contact with his grandfather to times when they are not alone together for significant amounts of time, you can still maintain the relationship without placing your child at high risk. It is up to you if you decide to share your plan with your father in law or mother in law, though you may have to if you wish to continue to have your son stay there when you are out.
If you chose to speak with your father in law about this, you may wish to let him know that you feel confused about what to do, and don't see a perfect solution. As a father, we would hope that he can put himself in your position and be understanding that your little one's safety has to be your top priority--no matter what everyone's feelings about it. As your son's father, you may have to make decisions that the rest of the family does not like, but that is part of the 'parenting package' sometimes.
By the way, you probably won't be able to speak with your son about whether or not anyone has touched him inappropriately yet. For a child this young, adults routinely touch all parts of them for toileting and bathing. Unless the touch hurts (sexual touching of children often does not actually hurt them, and may even feel good or make them feel special), he won't be able to tell you much useful information. If he does report touch that hurts, take him right to the pediatrician for an evaluation. If his behavior has changed, such as sleeping/eating differences, increased fears or fussiness, or if he seems reluctant to be with his grandfather--pay close attention to this. If he remains happy and seemingly carefree, then that's a great sign.
You can begin to introduce your son to ideas about 'good touch', 'bad touch' and 'secret touch'. Some psychologists use the word 'secret touch' because it is hard for children to recognize that sexual touching is 'bad' even if it does not actually hurt. Sexual touch is usually done with the child admonished to keep it a secret, maybe being promised a reward for doing so. We tell little children simply that no one, not even a doctor, should ever touch your private parts (defined as the parts covered by your underpants) unless your mommy or daddy is there (or a teacher--teachers often do toileting help with an open door to ensure that they supervise each other). You can tell him that if a grown up wants to do 'secret touch' he should run and tell you and mommy. Thats about all they can handle when they are five and under, but that can be enough to help them recognize a bad situation.
Best wishes to you in handling this awful situation
Disclaimer: This post is written for informational purposes only. It is never intended to replace face-to-face medical or psychological care. This post is not intended to create a patient-clinician relationship, nor to give or rule-out a diagnosis.