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Circular 230 and conflicts of interest.

Treasury issued Circular 230 final regulations in July 2002, governing practice before the IRS. Treasury Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents and Appraisers Before the Internal Revenue Service, imposes duties and restrictions on practitioners, including in Section 10.29 a ban on representing conflicting interests before the IRS.


Section 10.29(a) bars practitioners from representing a client before the IRS if this involves an actual (not merely potential) conflict of interest. "A conflict of interest exists if: (1)The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client, a former client or a third person or by a personal interest of the practitioner." Under Section 10.29(b), such representation can nevertheless occur if (1) it is not prohibited by law, (2) the practitioner reasonably believes that he or she can diligently and competently represent each affected client and (3) each affected client gives informed written consent. Under Section 10.29(c), a practitioner must retain copies of the client's informed consent for a minimum of 36 months from the date the representation is concluded, and furnish it to the IRS on request. There have been no authoritative pronouncements on this issue since the final regulations were published.

Practice Before the IRS

IRS Pub. 947, Practice Before the IRS and Power of Attorney, defines practice before the IRS as all matters relating to any of the following: communicating with the IRS for a taxpayer regarding the taxpayer's rights, privileges or liabilities under IRS-administered laws and regulations; representing a taxpayer at conferences, hearings or meetings with the IRS; and preparing and filing necessary IRS documents for a taxpayer. Because this definition is broad, it may, for example, include a variety of engagements, such as estate planning, resolving marital disputes and representing passthrough entities.

Just preparing a tax return, furnishing information at the IRS's request or appearing as a witness for the taxpayer, is not practice before the IRS. These acts can be performed by anyone to the extent provided by the regulations governing practice before the IRS.


Section 10.29(a) prohibits a practitioner from representing a client before the IRS if the representation involves a conflict of interest, except with the express consent of all directly interested parties after full disclosure. In discussions with the AICPA, IRS representatives have stated that practitioners need not maintain a central file for all conflict-of-interest waivers; rather, these records may be retained with the engagement file. They also indicated that Section 10.29 is not intended to be an audit trap; they will not conduct audits for the sole purpose of testing compliance.

Although consent for potential conflicts was removed from the final regulations, practitioners should still monitor potential conflicts to avoid being caught unprepared during a representation engagement. This may be a more significant issue (1) for passthrough entities, in which the conflicts may not be obvious or (2) between a practitioner and client. For example, a conflict could occur between a practitioner and a client on advice given as to disclosure requirements to avoid preparer and taxpayer penalties.


Section 10.29 does not address the form and substance of consent. The only requirements are that consent be obtained in writing and retained for at least 36 months from the date representation ends. In the absence of IRS guidance, tax advisers are left to seek guidance from other professional standards. However, consent should at least adequately describe the nature of the conflict and the parties the practitioner represents.


The practitioner's staff may need additional training to identify conflicts of interest before being engaged on a project. Firms with multiple service lines or offices may need to implement additional procedures and systems to determine whether conflicts may exist. Relationships with passthrough entities should be evaluated for potential conflicts. The practitioner should also evaluate the potential litigation risk related to performing services for parties with actual conflicts, and review the conflict with his or her insurance carrier.


A few issues remain unresolved--should Section 10.29 he expanded to more clearly define "conflict of interest" and "informed consent"? For now, practitioners must rely on professional judgment and other similar standards for professional conduct.

The preamble to the Circular 230 final regulations stated that they were modified from the proposed regulations to conform more closely to the approach of the recently revised Model Rule 1.7 of the American Bar Association (ABA's) Rules of Professional Conduct. The AICPA Code of Professional Conduct also addresses conflicts of interest. CPAs should be careful about reliance on Rule 102-2, because ABA Model Rule 1.7 is more comprehensive than AICPA Rule 102-2.

Practitioners should also evaluate any state, local and foreign independence rules that may apply. Legal counsel should be consulted to resolve differences.

For an analysis of all the Circular 230 final regulations, see Gardner, Eide and Willey, "Circular 230 Final Regs. (Parts I and II)," 34 The Tax Adviser 26 (January 2003) and 34 The Tax Adviser 96 (February 2003).


Mark H. Ely, J. D., CPA Partner

Washington National Tax KPMG LLP Washington, DC
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Author:Ely, Mark H.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Jan 1, 2004
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