Tax practice responsibilities: conflicts of interest: IRS rules differ from AICPA professional standards.

• Author: Horwitz, Kenneth M.

Editor: Thomas J. Purcell III

CIRCULAR 230, THE TREASURY REGULAtions governing ethical standards applicable to practice before the IRS, deals with conflicting interests at Section 10.29 (31 C.RR. [section] 10.29). It forbids federal tax practitioners from having conflicts of interest, defined as representation of one client that is directly adverse to that of another client, or representing a client in circumstances creating 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.

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However, a practitioner may represent a client despite a conflict of interest if the practitioner reasonably believes he or she can provide competent and diligent representation to each affected client and if all affected clients waive the conflict by giving their written informed consent.

Circular 230 has at least two major potential effects on covered practitioners: (1) Violation of a Circular 230 standard may subject the practitioner to sanction by the IRS Office of Professional Responsibility (OPR); and (2) Circular 230 may be used in a lawsuit for damages filed by a client in connection with asserted errors and omissions by the practitioner as the standard to which the practitioner should be held in performing services. Thus, CPAs have a strong interest in understanding the standards to which they will be held under Circular 230. This column, is a limited discussion of the application of conflict-of-interest rules in a federal tax practice.

The original version of Section 10.29 (essentially unchanged since before 1976) was a simple three-line prohibition against representing clients with conflicting interests except by express consent of all directly interested parties after full disclosure. In 2002, Section 10.29 was amended to its current form, with additional enhancements in 2007 that included requiring that a known conflict of interest may he waived only by the informed consent of each affected client, confirmed in writing by the client.

The rules in Section 10.29 are relatively terse and contain numerous terms that are subject to varying possible interpretations. The AICPA opposed any change to Section 10.29 from the 1992 version in a comment filed with then-IRS Commissioner Charles Rossotti on July 7, 2000. Proposed regulations published by the IRS on January 12, 2001, were substantially revised to meet objections (including those of the AICPA). However, the preambles to the final regulations in 2002 (T.D. 9011) and again in 2007 (T.D. 9359) made clear Treasury's intent to strengthen the language of Section 10.29 and to modify it to conform more closely with Model Rule 1.7 of the American Bar Association Model Rules of Professional Conduct. The preamble to T.D. 9359 in 2007 stated that Section 10.29 as amended was broader than the ABA model rule (by, for example, requiring client confirmation in writing). The preamble said that the rules were designed to "protect taxpayer interests and protect settlements from future collateral attack." One pair of writers has commented that "precedent from comparable ethical rules, rule commentaries, bar opinions, and the like may be helpful applying the rules, but are not binding" (Cavanagh and Hynes, Navigating an OPR Disciplinary Proceeding, 2010 TNT 95-6 (May 18, 2010)).

The rules of Section 10.29 apply only where the CPA is acting as a practitioner as defined in Circular 230. Thus, for example, if a CPA is an expert witness in a state law trial dealing with federal tax issues, he or she is not acting as a practitioner as defined in Circular 230. However, the AICPA Code of Professional Conduct and other AICPA and state professional standards may still apply to such testimony. A CPA subject to the Statements on Standards for Tax Services (SSTS), the enforceable tax practice standards for members of the AICPA, is generally required to follow them with respect to tax practice and to follow other AICPA professional standards as applicable, unless a stricter standard applies. Thus, if Section 10.29 provides a stricter rule on the definition of conflict of interest and how to deal with such a conflict in the context of acting as a practitioner (as defined in Circular 230), a CPA should follow Section 10.29. However, he or she should in all events follow the AICPA professional standards as a minimum standard.

UnderlyingValues Integrity and Objectivity

The Circular 230 standard on conflicts of interest and ABA Model Rule 1.7 on which it is based emphasize conflicting professional responsibilities--when the representation of one client may be directly adverse to another client. In this respect, they differ from the AICPA Code of Professional Conduct and other standards, which emphasize the broader values of integrity and objectivity (and, in attestation engagements, independence) (see Code of Professional Conduct ET [section] 102-2.03). What effect this difference may have in Section 10.29's application requires further exploration. Section 10.29 does not include the rest of the ABA Model Rules upon which the interpretation of Rule 1.7 rests. Sections 10.29(a) and 10.29(b) define when a conflict of interest exists and when, notwithstanding the existence of a conflict of interest, a practitioner may represent a client. Unstated is the extent to which the interpretations of Section 10.29 will follow the comments on the ABA Model Rules or case law interpreting them.

Under the AICPA professional standards, a CPA is required to maintain objectivity and integrity, he free of conflicts of interests, and...