Tax Preparer Ethics in the Modern World, Part 2

Welcome back to my series on “Ethics in the Modern World.” Part 1 is about Circular 230, due diligence, and competence, and in part 2, I’ll discuss conflict of interest, return of client records and disclosures.

Conflict of Interest

Generally, a tax practitioner is prohibited from representing a client if a conflict of interest exists. What is a conflict of interest?

• When representing one client will adversely affect another client.

When the representation of one client will be materially limited by the practitioner’s responsibilities to another client or a personal interest.

If a conflict exists, the tax practitioner may represent the client with consent, but only if they reasonably believe that they will be able to provide competent representation to each client, the representation is not prohibited by law, and each affected client waives the conflict of interest in writing. Copies of the consent must be retained for at least 36 months after the conclusion of the representation.

Situations where a conflict of interest may arise include:

• Audits: A tax practitioner who prepared the return under audit might be worried about preparer penalties and might be less supportive of the client. The practitioner can only proceed with the audit engagement if they believe that they can work in the client’s best interest, the practitioner is not legally prohibited from continuing the engagement, and each person is notified in writing of the conflict of interest and consents to the engagement.
• Partnerships: Giving tax advice to one partner with regards to the partnership may adversely affect the other partner.
• Divorces: Giving tax advice to one spouse will very likely adversely affect the other, especially when it concerns alimony and child support payments. Watch out for innocent and injured spouse issues. There might be omitted income from sources the taxpayer does not want the spouse to know of.

Here’s a sample letter for you to consider personalizing for your own practice, if needed:

Because I intend to represent both you and your ex, it is my responsibility to disclose to you the possibility of a conflict of interest. As a practitioner, I believe that by representing you before the IRS or in preparing your tax returns, neither of you will be negatively affected. However, before I may represent you, you must agree in writing that I have disclosed a possible conflict of interest.

By signing and returning this disclosure to my office, you are affirming that you have received, read, and agree to the paragraphs below:

1. Before I may prepare your tax return with you filing as single, head of household, or married filing separately, you acknowledge that I cannot use information you supply to me for your tax return or your ex-spouse’s tax return if that information conflicts with information your ex supplied to me. All information received will be kept in the strictest confidence and will not be disclosed to your ex-spouse.
2. You agree to review any returns that I prepare. You also agree that you understand the information reported on the returns and, in your opinion, agree that all income has been reported.

Return of Client Records

Whether or not the fees have been paid, a tax practitioner is required to return clients’ records. Clients’ records include all documents the client provided, all materials prepared by the client or a third party, and any document prepared by the practitioner that was given to the client in a prior engagement, if that document is necessary for the client to comply with tax law.

Client records do not include the practitioners’ work product, unless the client has already paid for it, including any tax return that the client has not paid for. The tax professional must give reasonable access to the client to review and copy any additional records that were retained by the practitioner.

Disclosures

Allowable disclosures are disclosures to a second taxpayer who is listed on the return if that taxpayer is related to the first taxpayer, the interest of the first taxpayer is not adversely affected by the disclosure and the first taxpayer has not prohibited you from disclosing information to the second taxpayer.

Who is considered related?

• Spouse
• Child or parent
• Grandchild or grandparents
• General partner in a partnership
• Trust or estate and the beneficiary

Disclosure without consent is allowed when a court order or subpoena is issued by a federal, state or local court. The required information must be clearly identified for a preparer to disclose.

Disclosure without consent is also allowed when an administrative order, demand, summons or subpoena is issued by any federal agency, such as the IRS, state agency or commission charged under the laws of the state with licensing, registration or regulation of tax return preparers.

In addition, disclosure is allowed to report a crime to authorities, even if the preparer is mistaken and no crime was actually committed. The preparer will not be subject to sanctions or peer review, and a preparer may disclose client information to his attorney or an IRS investigator in self-defense.

For example, a tax preparer is under IRS investigation for possible misconduct. He hired an attorney to assist in the matter. It is discovered that the bookkeeper had been stealing client checks. He may disclose confidential client information to his attorney and the IRS during the investigation to assist with his own defense.

Sec. 7216 prohibits tax return preparers from using tax return information for unauthorized purposes. This is applicable specifically to preparers who also offer other services, such as insurance sales or brokerage services. Preparers are allowed to use a list of clients’ names, addresses, emails and phone numbers to provide general education information related to ancillary services that may be provided by the office, but direct solicitation for these services is prohibited.

For More Information

• Circular 230, Regulations Governing Practice Before the Internal Revenue Service
• Publication 947, Practice Before the IRS
• Publication 4687, Refundable Credits Due Diligence

Editor’s note: For more information, read the series on ethics from Mike D’Avolio, CPA, JD.