What does it look like to operate ethically in the world of tax planning? Fortunately, the Office of Professional Responsibility (OPR) provides guidance on key ethical questions. Their primary resource, known as Circular 230, covers “Regulations Governing Practice before the Internal Revenue Service.” Depending on your status and credentials, adhering to Circular 230 may even be a requirement. This applies to enrolled agents (EAs) and Annual Filing Season Program (AFSP) record holders among others.
Circular 230 regulations are intended for those who “practice” before the IRS, but the ethical standards of conduct can apply to any tax professional. Reviewing these rules can help you avoid overstepping a legal boundary by training you to ask the right questions. For instance, when deciding whether to take on a tax engagement, consider this question: could taking this engagement result in a conflict of interest? Tax professionals want to believe they have their clients’ best interests at heart, but there are certain situations that make it difficult—or nearly impossible—for even the best tax professionals to do their job impartially.
What constitutes a conflict of interest? The first aspect to consider is if working with one client could be directly adverse to another client. For example, say you are already working with a taxpayer who owns 80% of an S corporation that has a significant amount of unpaid taxes. Your client’s business partner owns 20% of the S corporation, and they ask if you could work on the business partner’s taxes as well. This would be a conflict of interest. If the original client (80% owner) is held liable for the unpaid taxes, the business partner (20% owner) would benefit—and vice versa. Their interests are adverse to one another, and therefore, it would be wisest to refer the business partner to someone else who could effectively represent them.
A second factor to consider is if there is significant risk. The risk does not have to be certain—this simply means that there is a distinct possibility that your ability to work with one client will be limited by your responsibility to an existing client, a former client, a third party, or your own personal interest. Let’s return to the S corporation as our example. Say the company itself wants to hire you to do its yearly tax plan. Since we have a majority owner who holds 80% of the company and a minority owner who holds 20% of the company, you may find that whatever is in the best interest of the majority owner is not in the best interest of the minority owner. How do you decide how to construct the business’ tax plan? Problems can also arise when we are dealing with different levels of income. Because you cannot optimize tax savings for one party without causing disadvantage to the other, you have a conflict of interest.
What does it mean to have a conflict with your own personal interest? As a tax planner, if you recommend a tax position to a client and that position is disallowed or challenged in an exam, one way for the taxpayer to avoid an accuracy-related penalty is to demonstrate that they relied on the advice of a tax professional. This would also create a conflict of interest.
If you are looking for additional guidance in understanding what constitutes a conflict of interest, note that Circular 230 is written by lawyers. How do lawyers determine if there may be a conflict of interest before taking on a client? The ABA Model Rules for Professional Conduct can be a great resource that gives more language to potential entanglements. Take, for example, the question of a conflict with the personal interests of the tax practitioner. The ABA says that if the “probity” (honesty and decency) of a lawyer’s conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice. For tax professionals, if your position on a tax return is in question, know that it would be difficult to maintain a detached perspective. If you believe there may be an error or a problem, then it may make sense in the examination to refer the case to someone who can handle it more objectively.
Now is it possible to work with someone even if there could be a conflict of interest? The short answer is “yes,” provided that you gain written informed consent from all affected parties. This includes existing clients and prospective clients. You will need to keep records of their consent for at least 36 months—IRS agents have been known to ask for this. The regulations also require that you sincerely believe that you can provide competent and diligent representation to both parties and that your work with them is not otherwise prohibited by law.
Summary
When in doubt, the best rule of thumb is not to take on a new client if there is the potential for a conflict of interest. Unfortunately, there is no simple template for written consent. Written informed consent is going to be different in each case because the potential adverse effects on each client will likely be different, depending on the relationship involved. By familiarizing yourself with guidelines like Circular 230 or the ABA Model Rules for Professional Conduct, you can prepare yourself to identify and avoid conflicts of interest that could compromise your professional integrity.
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