Identifying conflicts of interest when providing tax compliance services.

During a typically hectic filing season, practitioners must keep in mind the practical effect of professional standards on the performance of tax compliance services. In many cases, checklists and office procedures help tax advisers meet their professional obligations. However, some obligations--such as those involving conflicts of interest--are not easily addressed by these standardized measures.

AICPA and Treasury Rules

Both the AICPA Code of Professional Conduct (Interpretation 102-2 of Rule 102) and Treasury Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service (Circular 230), Section 10.29, provide guidance on conflicts of interest, including how one may be waived. Generally, both sets of rules permit a practitioner to provide services, even if a conflict of interest exists, provided:

* All affected parties are fully informed and consent to waive the conflict; and

* The tax adviser believes he or she can objectively perform services for the affected parties, despite the conflict.

Certain conflicts cannot be waived, either because the potentially competing interests are too adverse or for other reasons. For instance, if a client interest is directly adverse to the practitioner's own interest, it is unlikely that the latter could act objectively. If a tax adviser cannot resolve a conflict of interest (e.g., by waiver or disengagement from one or more clients), he or she is barred from performing services for that matter.

The AICPA rules do not require written evidence of a client's consent to waive a conflict; however, Circular 230 requires written consent to waive a conflict. Such consent must be maintained by the practitioner for at least 36 months after conclusion of representation of the client. (On Feb. 3, 2006, the IRS proposed amendments to Circular 230 that would require the written waiver to (1) be acknowledged by the client and (2) occur at the time the conflict's existence is known to the practitioner. These changes would not recognize a client's oral consent to waive a conflict, even if such consent is documented in writing by the practitioner, unless the documentation occurs at the time the tax adviser identifies the conflict and the client acknowledges the documentation. The proposed changes generated significant discussion about whether this approach is warranted; see, e.g., AICPA Letter to IRS Commissioner Mark W. Everson (5/9/06).)

Conflicts in Tax Compliance

Many practitioners can readily identify a conflict of interest in tax planning (e.g., providing tax advice to both the purchaser and the target on the purchaser's acquisition of the target). However, a conflict of interest may arise in the context of providing tax compliance services.

Example 1: X is the president and chief executive officer of S Corp., a small, family-run business. S engages P to prepare tax returns for the company, its officers and its shareholders (all family members). As P prepares S's return, there is a question as to whether a payment the company made to X is a nondeductible return of capital or a deductible payment of compensation. Resolving the question one way is favorable to X, but unfavorable to the other shareholders; resolving it the other way is unfavorable to X, but favorable to the other shareholders. Under these circumstances, P has a conflict of interest.

Example 2: Q, Y and Z, all individuals, are partners in L, a limited partnership. Q is the general partner and the tax matters partner. Q engages A to prepare L's return. A is separately engaged by Q, Y and Z to prepare their individual returns. While preparing Us return, A identifies an issue as to the meaning of a provision in the partnership agreement that will affect the allocation of partnership items to the partners. This provision could be interpreted to provide an allocation of certain tax benefits to Q, to the detriment of Y and Z. Under these facts, A has a conflict of interest.

Example 3: H and W were married for all of 2006. In 2007, they began divorce proceedings. In early 2007, H engages J to prepare the couple's joint tax return for 2006. Not long after, W (through her attorney) asks J to prepare her 2006 tax return as married filing separately. When J informs W's attorney that he was already engaged by H to prepare a joint return for the couple, the attorney informs J that W has no intention of signing a joint return. Under these facts, J has a conflict of interest.

These are just a few situations in which a conflict of interest may arise in the course of providing tax compliance services. Practitioners should be aware of these situations and take appropriate steps to resolve any conflict of interest that arises. For assistance, AICPA members can call the Ethics Hothne, at [phone], or e-mail [e-mail].

From Rochelle Hodes, PricewaterhouseCoopers LLP, WAshington, DC