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In conflict? take note of conflict of interest issues addressed in circular 230.

Conflict of interest issues are always of paramount importance for CPAs. Conflicts in tax practice, though, are somewhat different than those that may arise during the performance of an attest function, for example.


Under Circular 230, Sec. 10.29, CPAs may not represent taxpayers in situations where there is a conflict of interest except where the practitioners reasonably believe that they are able to provide competent and diligent representation to affected clients.


A conflict of interest exists when the representation of one client is adverse to another client, or if there is a significant risk that representation of one client will be limited by the practitioner's responsibilities to another client, former client, third person or their personal interest.

Furthermore, the conflict of interest rules require that representation must not otherwise be prohibited by law, full disclosure must be made to all directly interested parties and all affected clients must provide their written consent for representation.

A practitioner must retain copies of all written consents for three years from the date of the conclusion of the representation and provide them to the IRS on request.


In an earlier proposed revision to Circular 230, practitioners were prohibited from rendering services in situations where a "potential" conflict existed. Several organizations, including the American Bar Association and the AICPA, strongly criticized this approach and it was removed in the final version.

Although the removal of the potential conflicts provision narrowed conflict of interests to situations in which the parties' interests are directly adverse, practitioners may want to identify potential conflicts in all tax engagements.

A careful determination of potential conflicts will identify potential conflicts will identity those situations in which the probable risk that a directly adverse situation of sufficient magnitude will arise that indicates the practitioner may be well advised to withdraw from or not accept an engagement or parts of an engagement.


Conflicts and potential conflicts of interest are often more pervasive than practitioners recognize. This often occurs when several parties are involved in a common enterprise or relationship, and little thought is given to situations in which their interests may vary or conflict. In these situations, practitioners can find themselves in the middle of a tug of war between the parties.

These situations commonly involve married couples; family business relationships; partner or partnership tax issues; and corporation and officer/shareholder issues. Practitioners can evaluate the potential for conflict at the engagement's initial stages to prevent problems from arising.

Another area of concern may arise in connection with preparation of returns or in giving advice in connection with tax return preparation.

Upon subsequent IRS examination of the returns, issues related to potential taxpayer penalties might arise that would place the practitioner in conflict with the client. This may happen, for example, when there is an error in the return that puts the client in jeopardy for assessment of the accuracy-related penalty.

Practitioners may be tempted to try and handle the entire matter to mitigate their exposure to practitioner penalties or IRS discipline. This, however, is a situation where a prohibited conflict exists between the client and practitioner's personal interest.

Practitioners may represent a client when a conflict exists if they are able to provide competent and diligent representation to each affected client, any representation is not otherwise prohibited by law, and each affected client gives informed consent confirmed in writing.

Copies of written consent must be retained until at least 36 months from the date of conclusion of the representation and must be provided to any IRS officer or employee upon request.


In February 2006, the proposed amendments to Circular 230 included changes to documenting conflicts of interest. The changes provide that the affected clients must waive the conflict and give informed consent in writing at the time the conflict of interest is known by the practitioner.

Waiving the conflict allows practitioners to serve the client without incurring liability to the conflicting parties for failure to withdraw. It also prohibits the IRS or courts from imposing discipline on a practitioner for representing conflicting parties (including situations where the practitioner is a conflicting party).

Consequently, the amendments appear to require that once CPAs identify a conflict, they must suspend representation of the affected client(s) until a signed waiver from the client is received (as opposed to securing an oral waiver followed by subsequent written documentation).

Finally, in securing a written confirmation of waiver from the affected client(s), CPAs are advised to ensure that the description of the nature of the conflict does not reveal information for which the client(s) may assert claims of privilege under Sec. 7525 (for communications with Federally Authorized Practitioners) or the work product doctrine.

The IRS may contend that the description constitutes a waiver of the underlying subject matter of the privilege protection, effectively denying any privilege.

Kip Dellinger, CPA is senior tax partner at Kallman and Co. LLP in Los Angeles. You can reach him at

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Author:Dellinger, Kip
Publication:California CPA
Geographic Code:1USA
Date:Jan 1, 2007
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