Identifying conflicts of interest when providing tax compliance services.

• Author: Hodes, Rochelle

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...