Representation before the IRS · Building the Taxpayer's Case: Preliminary Work

Conflict of interest in regards to representation

Conflicts arise constantly in tax practice and almost never announce themselves. A married couple splitting up, a corporation and its officer facing a trust fund recovery penalty, two partners whose interests diverge once an adjustment lands, a client whose fee is contingent on an outcome the practitioner also has a stake in — each is a conflict under Circular 230 § 10.29, and each is representable only if three conditions are met. The rule is short, mechanical, and where practitioners get caught it is almost always on the paperwork rather than the judgment.

The rule

The prohibition. “Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest” (Circular 230 § 10.29(a)).

The two definitions. See the figures table (§ 10.29(a)(1)–(2)). A conflict exists if either the representation of one client “will be directly adverse to another client,” or 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.

Note what the second limb reaches: a former client, a person who is not a client at all, and the practitioner’s own interest. The rule is not confined to two current clients on opposite sides.

The exception, and its three conditions. See the figures table (§ 10.29(b)). All three must hold:

1. The practitioner reasonably believes they “will be able to provide competent and diligent representation to each affected client”;
2. The representation “is not prohibited by law”; and
3. Each affected client waives the conflict 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.”

The 30-day rule. “The confirmation may be made within a reasonable period after the informed consent, but in no event later than 30 days” (§ 10.29(b)(3)). So consent may be given orally first, but the written confirmation has an outside limit.

Retention and production. See the figures table (§ 10.29(c)). Copies of the written consents must be retained “for at least 36 months from the date of the conclusion of the representation of the affected clients,” and “must be provided to any officer or employee of the Internal Revenue Service on request.”

The competence limb is a real test. Condition (b)(1) borrows the standard in Circular 230 § 10.35 — see the figures table — which requires “the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter.” A practitioner who cannot honestly say they can act competently and diligently for each affected client cannot cure that with consent.

Current figures

How it works in practice

Screen at intake, and screen again when facts change. Most conflicts are not present at engagement and appear when a fact emerges — an adjustment that falls on one spouse, an officer who signed the payroll cheques, a partner who took a distribution the others did not know about. The obligation attaches “at the time the existence of the conflict of interest is known by the practitioner,” so the clock starts when you find out, not when you were engaged.

Consent must be informed, which means explaining what the client is giving up. A signature on a boilerplate paragraph is not informed consent. The client needs to understand who else is being represented, how their interests diverge, what the practitioner will not be able to do for them because of it, and that they may take separate representation instead. Write that down in the consent itself; it is also the evidence that the consent was informed.

Thirty days is an outside limit, not a target. Get the written confirmation at the time. The rule permits a reasonable period after oral informed consent precisely because conflicts surface mid-conversation — but a consent confirmed on day 29 invites the question of what the practitioner did in the meantime.

Thirty-six months runs from the end of the representation, not from the consent. The retention period is measured “from the date of the conclusion of the representation of the affected clients.” On a long engagement that can be years after the consent was signed. File consents where the engagement file closes, not where the correspondence goes.

The IRS can ask for them, and you must hand them over. Section 10.29(c) requires the consents to be provided to any IRS officer or employee on request. That is not a subpoena and there is no discretion in it. A practitioner who took consent orally and never confirmed it in writing has nothing to produce, and the failure is visible.

Joint returns are the everyday case. Preparing or representing on a joint return involves two clients whose interests can diverge the moment an innocent spouse issue, an allocation question or a separation appears. It is not automatically a conflict, but it becomes one quickly and the practitioner should be alert to the trigger rather than assuming the joint filing settles it.

The entity and the individual are different clients. Representing a corporation does not mean representing its officers, and the trust fund recovery penalty is where that divides sharply: the corporation’s interest may be served by an allocation that increases an officer’s personal exposure. Decide early who the client is, say so in writing, and treat the other as unrepresented.

A personal interest counts. The second limb includes a “personal interest of the practitioner” — a fee arrangement, a business relationship with one party, a family connection, an interest in the transaction being examined. These are the conflicts practitioners are least likely to spot because they are looking at the clients rather than at themselves.

How this has changed

Section 10.29 in its current form dates from 2007. The section is “applicable on September 26, 2007” (T.D. 9359), and that revision brought Circular 230 into line with the professional conduct rules lawyers and accountants already worked under — the directly-adverse and materially-limited formulation, the informed consent confirmed in writing, and the 30-day and 36-month periods. Material describing a looser standard is pre-2007.

Competence became a separate obligation in 2014. Circular 230 § 10.35 is “applicable beginning June 12, 2014” (T.D. 9668). Before that revision § 10.35 was the covered opinion rule, and competence as a free-standing duty did not exist in those terms. That matters here because § 10.29(b)(1) is measured against it: the first condition for acting despite a conflict now points at a defined standard rather than at a practitioner’s self-assessment.

Reliance on others was addressed at the same time. Circular 230 § 10.22(b), also applicable from 12 June 2014, presumes due diligence where a practitioner relies on another person’s work product and used reasonable care in engaging, supervising, training and evaluating them. It matters to conflicts because staffing a matter around a conflict does not remove the practitioner’s own responsibility.

The covered opinion rules were removed in the same 2014 revision. Practitioners who trained before it will remember § 10.35 as a long and detailed opinion standard. It is now two sentences on competence, and the old covered opinion apparatus is gone.

Exam focus

Know the two definitions of a conflict: directly adverse to another client, or a significant risk of being materially limited by responsibilities to another client, a former client, a third person, or the practitioner’s own personal interest.

Know that representation is permitted despite a conflict only if all three conditions in § 10.29(b) are met — reasonable belief in competent and diligent representation of each affected client, not prohibited by law, and informed consent confirmed in writing by each.

Know the 30 days: written confirmation may follow oral informed consent within a reasonable period but no later than that.

Know the 36 months: consents are retained at least that long from the conclusion of the representation, and must be given to any IRS officer or employee on request.

Know that competence under § 10.35 is the appropriate level of knowledge, skill, thoroughness and preparation, attainable by consulting experts or studying the law.

Know that the duty attaches when the practitioner knows of the conflict — which is usually mid-engagement, not at intake.

Check yourself

1. Which of these is a conflict of interest under Circular 230 § 10.29? (A) Only where two current clients are directly adverse (B) Also where a significant risk exists that representation will be materially limited by duties to a former client, a third person, or the practitioner’s personal interest (C) Only where the clients are related (D) Only where the practitioner is paid by one of them Answer: B. The second limb reaches former clients, non-clients and the practitioner’s own interest.

2. What must accompany a client’s waiver of a conflict? (A) Nothing further (B) Oral informed consent (C) Informed consent confirmed in writing by each affected client, no later than 30 days (D) Approval from the Office of Professional Responsibility Answer: C. And the practitioner must also reasonably believe competent and diligent representation of each is possible, and the representation must not be prohibited by law.

3. How long must written consents be retained? (A) 12 months from the date of consent (B) 30 days (C) At least 36 months from the conclusion of the representation of the affected clients (D) Indefinitely Answer: C. And they must be provided to any IRS officer or employee on request.

4. A practitioner cannot honestly believe they can act competently and diligently for both clients, but both give written informed consent. May the practitioner act? (A) Yes — consent cures the conflict (B) Yes, if the consents are retained (C) No — all three conditions in § 10.29(b) must be satisfied (D) Yes, with OPR approval Answer: C. Consent is one condition of three, not a substitute for the others.

5. When does the obligation to address a conflict arise? (A) At engagement, always (B) At the time the existence of the conflict is known by the practitioner (C) When the IRS raises it (D) When the client objects Answer: B. Which is usually mid-engagement, as facts emerge.