The nature of tax practice presents a number of unique ethical issues. Tax practice requires compliance with multiple ethical frameworks. This creates ambiguities and raises complex questions. Courts have even questioned whether certain regulatory frameworks, such as Circular 230, are applicable to certain conduct of attorneys in practice before the IRS.[1]
These ambiguities can leave tax practitioners facing practical questions. This paper provides guidance with respect to some ethical issues and takes a comparative look at the primary sources of ethical rules in this context. Specific scenarios will be provided and analyzed to provide real-world practical examples of a proper response to ethical issues presented in a tax practice.
I. CONFLICTS OF INTEREST IN TAX PRACTICEA conflict of interest is an ethical issue that every tax professional understands on some level. But the standards imposed by multiple governing frameworks, especially when a professional is subject to each framework, create potential ethical dilemmas in the area of conflicts of interest—specifically when a professional undertakes a multi-party tax representation.
a. ABA Model Rules for Professional Conduct, Conflicts of InterestModel Rule 1.7 of the ABA Model Rules of Professional Conduct sets out the general conflicts of interest principles for an attorney. Subsection (a) of Rule 1.7 provides that a lawyer cannot represent a client if there is a concurrent conflict. See ABA Model Rules of Professional Conduct 1.7(a). It defines a concurrent conflict as follows:
A concurrent 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 lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
Id. Rule 1.7(b), however, will permit an attorney to undertake a representation that presents a concurrent conflict if certain conditions are met. Specifically, Rule 1.7(b) provides as follows:
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
Id. at Rule 1.7(b). This Rule provides attorneys with discretion to undertake representations that might actually present a concurrent conflict of interest as long as the conditions are satisfied.
These conflicts can generally be waived by the client, if such waiver is made under informed consent and in writing, but the attorney should pay special attention to the exceptions to waiver under subsections (1) and (3) above. Even if the attorney might otherwise be able to waive the conflict, the attorney should decline representation due to a conflict of interest if he or she believes that he or she cannot provide competent legal representation given the conflict, or the representation involves the assertion of a claim by one client against another. Id.
b. AICPA Code of Professional Conduct, Conflicts of InterestThe AICPA conflicts of interest rules are set forth in the AICPA Code of Professional Conduct § 1.100 and § 1.110. The AICPA standard for Conflicts of Interest somewhat mirrors that of the Model Rules. For example, if a CPA believes that the representation can be undertaken with objectivity despite a conflict of interest, and the CPA discloses the conflict to the client and the client gives consent, then the CPA can continue with the representation. See AICPA Code of Professional Conduct § 1.110.010.12. But the AICPA Code does not allow a CPA to waive a conflict of interest in a representation that requires independence under the Rules, such as in an audit or attestation engagement. See id.§ 1.110.010.03.
The AICPA Code, unlike the Model Rules, provides a specific framework for evaluating conflicts of interest The AICPA Code identifies not only specific scenarios where a conflict of interest might exist, but it also requires the use of a “formula” to evaluate the severity of a conflict of interest as follows:
When an actual conflict of interest has been identified, the member should evaluate the significance of the threat created by the conflict of interest to determine if the threat is at an acceptable level. Members should consider both qualitative and quantitative factors when evaluating the significance of the threat, including the extent to which existing safeguards already reduce the threat to an acceptable level. In evaluating the significance of an identified threat, members should consider both of the following:
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- The significance of relevant interests or relationships.
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- The significance of the threats created by performing the professional service or services. In general, the more direct the connection between the professional service and the matter on which the parties’ interests are in conflict, the more significant the threat to compliance with the rule will be. If the member concludes that the threat is not at an acceptable level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable level
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In cases where an identified threat may be so significant that no safeguards will eliminate the threat or reduce it to an acceptable level, or the member is unable to implement effective safeguards, the member should (a) decline to perform or discontinue the professional services that would result in the conflict of interest; or (b) terminate the relevant relationships or dispose of the relevant interests to eliminate the threat or reduce it to an acceptable level.
- The significance of the threats created by performing the professional service or services. In general, the more direct the connection between the professional service and the matter on which the parties’ interests are in conflict, the more significant the threat to compliance with the rule will be. If the member concludes that the threat is not at an acceptable level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable level
See id. § 1.110.010. The AICPA code goes into further detail and describes the different types of threats that may be present in a representation, and also lists what safeguards might mitigate such threats to an acceptable level. In essence, the AICPA Code makes a concerted effort to clarify exactly when conflicts of interest might exist in a representation, while the Model Rules merely provide a general rule that can be broadly construed.
c. Circular 230, Conflicts of InterestCircular 230 sets forth the ethical standards required by a tax professional to practice before the IRS. Section 10.29 of Circular 230 forbids tax practitioners from having conflicts of interest. Specifically, it provides:
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- Except as provided by paraparagraph (b)this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if—
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- The representation of one client will be directly adverse to another client; or
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- 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.
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Circular 230 § 10.29. But Circular 230 also provides for waiver of conflicts of interest if (1) the tax practitioner reasonably believes that he or she can still competently and diligently represent each client, (2) the representation is not prohibited by law, and (3) each client gives informed consent...
