Practical approaches to common conflicts of interest.

• Author: Mathers, Robert A.

This column highlights some common conflicts of interest encountered by CPA tax practitioners and offers some practical means of properly addressing the consequential ethical issues.

To provide some context for this discussion, consider the following situation: In 1998, an attorney wrote several tax opinions for prospective benefit plan participants concerning the plan's tax qualification, while at the same time he maintained an attorney-client relationship with the plan's promoter. The attorney later became a co-trustee of the plan. When the IRS challenged the plan, the attorney represented individual plan participants before the IRS with respect to their individual tax disputes, while continuing to serve as the plan's co-trustee.

Throughout this period, the attorney failed to advise his clients of his multiple engagements and roles, and, of course, he failed to obtain their informed consent to continue the representations. The IRS Office of Professional Responsibility (OPR) viewed these layers of conflicted representation as jeopardizing the rights of the various clients the attorney represented. In 2012, OPR censured the attorney because of these conflicts (see IRS News Release IR-2012-63, "Attorney Censured by the Office of Professional Responsibility for Mishandling Conflicts of Interest," (6/22/12) available at tinyurl.com/kefawrm).

Relevant Ethical Provisions

A practitioner does not need to be an attorney with multiple layers of conflicts to be in the middle of a conflict problem. The AICPA Code of Professional Conduct (AICPA Code), which applies to all members of the Institute (and, by reference, to practitioners in those states where the governing board of accountancy has incorporated the AICPA Code into the state-specific code of conduct), and Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), which applies to professionals who are licensed to practice before the IRS, both speak to conflicts of interest and how to address them.

AICPA ethics interpretations state that a conflict may occur whenever the member or someone in the member's firm "has a relationship with another person, entity, product, or service that could, in the member's professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member's objectivity" (AICPA Code, ET [section] 102-2, "Conflicts of Interest"). The rule does not prohibit providing a nonattest service, such as tax services, where such circumstances exist, as long as "the member believes that the professional service can be performed with objectivity, and the relationship is disclosed ... and consent is obtained" (id.).

Section 10.29 of Circular 230 spells out the following situations that are deemed to be conflicts:

(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 third person, or by a personal interest of the practitioner.

Section 10.29(b) provides that, even when a conflict exists, the practitioner may still represent the client if (1) the practitioner reasonably believes he or she will be able to provide competent and diligent representation to each affected client; and (2) assuming the representation is not prohibited by law, each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner.

Note that Section 10.29(b)(3) of Circular 230 allows the written confirmation to be made within a reasonable time after the informed consent, but in no event later than 30 days. In addition, Section 10.29(c) requires practitioners to retain the written consents for at least 36 months from the date of the conclusion of the representation of the affected clients. The written representations must also be available to the IRS upon request.

Commonly Encountered Conflicts

Based on the authors' experiences, the following are some of the more common conflicts encountered by CPA practitioners:

Example 1. Practitioner's personal interest: D, CPA, is also a registered representative with ABC Securities Inc. D is the income tax return preparer for E, who has a 1-year-old child. When delivering Es income tax return, D advises him that he would benefit from using a Sec. 529 qualified savings plan to save...