Conflicts of Interest: Staying Circular 230 Compliant (Part 1)

Conflicts of Interest: Staying Circular 230 Compliant (Part 1)

The term “conflict of interest” is a go-to phrase in the legal realm frequently referred to in professional misconduct suits where an engaged company or individual (usually a lawyer or law firm) winds up simultaneously representing two conflicting parties. The most common examples of a cut-and-dry conflict of interest would be the dual representation of two spouses going through a divorce, or two companies that are in direct competition with one another.

How Does the IRS Define a Conflict of Interest for Tax Professionals?

Circular 230 §10.29 provides a basic outline for what constitutes a conflict of interest in terms of representing a taxpayer and practicing before the IRS.

In essence, a conflict of interest exists when representing one client could have adverse effects on another client. The IRS also deems it a conflict of interest if a tax professional’s pre-existing responsibilities to a current or former client, third party, or personal relationship would materially impact the representation of one or more clients.

The True Meaning of Representation

Most tax professionals think of representation as going before the IRS and handling matters like responding to notices and desk audits (light-duty representation) followed by representing clients in field audits and negotiating settlements like offers in compromise (heavy-duty representation.)

However, for purposes of Circular 230 compliance, §10.2(a)(4) defines “practice before the IRS” as consulting with a client, rendering written or verbal advice, preparing tax returns and other documents, and the same types of light-duty and heavy-duty correspondence described. Even if the IRS is never interacted with, the above services are considered potential for conflict of interest.

Dual Representation and Misconduct

Tax professionals have access to identity information, current and historic financial performance, business models, and other sensitive information when engaged to prepare tax returns and advice. If a tax professional serves a small business client wherein a new client tries to engage them and it’s revealed they are competitors to some degree, knowledge of the pre-existing client’s current position presents an unfair advantage to the new client even if such information is not requested.

It is not considered misconduct if a solid engagement letter articulates that the conflicting parties consent to the dual representation, and the tax professional has full faith that they can provide competent and diligent duty of care. The most probable example of such a situation would be a married couple who is divorcing on amicable terms. Regardless of the type, such a representation arrangement cannot be in violation of any federal, state, or local laws.