Question

What is the example of ethical issues that a tax practitioner could face as a conflict in the following list?

1.Ethical issues involving amends returns: Example

2.contingent fees tax representations: Example

3.Multi- Party presentation: Example

How can circular 230 and ACIPA be used to determine how a tax practitioner should hand the process in the above lists examples

Answer 1

1. Ethical issues involving amended returns

Example - Badaracco v. Commissioner, 464 U.S. 386, 393 (1984)

Explanation -

Circular 230 § 10.21 governs a practitioner’s actions regarding errors on returns and filing amended returns. This section provides as follows:

A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

Circular 230 § 10.21. This section sets forth the actions that the practitioner must take in disclosing to the client non-compliance, errors, or omissions.

But the practitioner need not advise the client that filing an amended return is necessary. In fact, the practitioner should note that tax law does not require the filing of an amended return to correct an error.

Under Circular 230, the practitioner must explain the consequences of failing to correct the error or omission, such as the exposure to penalties, criminal action, its effect on future filing obligations, the possibility of an audit, or effect on duties to third parties such as stockholders or partners.

2. Contingent Fees Tax Representations

Example - Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014)

Explanation - Fees that are paid to the practitioner also presents specific ethical issues—namely in contingent fee representations. Charging contingent fees in tax practice representations requires analysis of the Model Rules, AICPA Code, and Circular 230 because each framework applies different standards regarding contingent fee representations. For instance, Circular 230 § 10.27 prohibits “unconscionable fees” charged for matters before the IRS. Although, a definition of “unconscionable fee” is not provided anywhere in Circular 230, the existence of a contingent fee may be a factor bearing on whether a fee is “unconscionable.”

The Model Rules provide a set of factors to determine if a fee is unconscionable. Model Rule 1.5 states the factors to be considered are:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) whether the fee is fixed or contingent.

But these factors only determine if a fee was likely to be unconscionable under Circular 230—contingent fees being only a single factor to be considered. It is important to note that the AICPA contains its own rules regarding the prohibition of contingent fee arrangements.

In tax practice, the AICPA Code prohibits contingent fees for the “prepar[ation of] an original or amended tax return or claim for a tax refund for a contingent fee for any client.” AICPA Code § 1.500.001.01(b). This standard may be the strictest regulation of contingent fee arrangements.

Contingent fees are otherwise prohibited by Circular 230, with only four specific exceptions. Circular 230 § 10.27(b). Tax practitioners, in matters before the IRS, may only charge contingent fees in the following scenarios:

• A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to—(i) an original tax return, or (ii) an amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving written notice of the examination of, or a written challenge to the original tax return.
  • A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.

• • A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

Id. Further, IRS Notice 2008-43 allows practitioners to collect contingent fees for services rendered “in connection with a claim under section 7623 of the Internal Revenue Code.” IRS Notice 2008-43. This Notice was meant to serve as interim guidance in 2008 until § 10.27 could be amended, but the IRS has yet to amend this section of Circular 230 to reflect the interim guidance.

Practitioners must take special note of such contingent fee rules, but should also be aware that recent cases have called into question whether the Department of Treasury can actually regulate such contingent fee agreements or certain types of professionals.

3. Multi- Party presentation

Explanation - Model Rule 1.6 generally prohibits an attorney from disclosing client information to third-parties. AICPA Code § 1.700.001 prohibits a CPA from disclosing confidential client information without the client’s consent. But Circular 230 does not contain any specific provision regarding confidentiality of client information.

In a multi-party representation, a client may divulge information in confidence to the tax professional that creates a conflict of interest. A common example is a trust fund recovery penalty investigation arising in the context of a partnership. The partners’ interests in such a situation may ultimately be directly adverse to one another regarding who should ultimately be considered the “responsible persons.”

The tax professional owes a duty of confidentiality to his or her clients. But the information provided by one client—information that if disclosed might breach such duty of confidentiality—might reasonably prohibit the professional from competently representing the other clients. For example, the disclosure by one partner that he or she willingly failed to deposit employment taxes might absolve the other partners of liability, but disclosure of this fact could breach confidentiality, especially if the partner requested that such information not be shared with the other partners. This situation presents a clear conflict of interest that potentially involves all three professional ethics frameworks. It is important that tax professionals understand the requirements of each framework to determine whether a conflict exists if it can be waived, and how it must be waived under each framework. Although, conflicts of interest are just a small portion of ethical issues that may arise in tax practice. Another common issue is analyzing contingent fee representations under ethical frameworks which we have already discussed above.