Key Takeaways
- Conflict exists when representation of one client is adverse to another.
- Also exists when practitioner's personal interest may limit representation.
- May still represent with informed written consent from all affected clients.
- Written consent must be obtained within 30 days of discovering conflict.
- Retain consent records for 36 months after representation ends.
- Must provide records to IRS upon request.
Conflict of Interest (Section 10.29)
Why This Matters for the Exam
Conflict of interest rules protect clients from practitioners whose judgment may be compromised. The exam tests whether you can identify conflicts, understand the waiver requirements, and know the record retention rules.
Expect at least 2-3 questions on conflicts, waivers, and the 30-day/36-month rules.
What Is a Conflict of Interest?
A conflict of interest exists when:
| Type of Conflict | Description |
|---|---|
| Adverse representation | Representing one client is directly adverse to another client |
| Material limitation | Significant risk that representation will be limited by responsibilities to another client, former client, third person, or practitioner's own interests |
Common Conflict Scenarios
| Scenario | Conflict? |
|---|---|
| Representing both spouses in a divorce-year audit | ✅ Yes (adverse interests) |
| Representing employer and employee on same issue | ✅ Yes (potentially adverse) |
| Representing a client against your former client | ✅ Yes (former client conflict) |
| Representing client when you have financial interest in outcome | ✅ Yes (personal interest) |
| Representing two unrelated clients on separate matters | ❌ No (no adversity) |
Representation Despite Conflict: The Waiver
A practitioner may represent a client despite a conflict if:
| Requirement | Description |
|---|---|
| Competent representation | Practitioner reasonably believes they can provide competent and diligent representation |
| Not prohibited by law | The representation is not legally prohibited |
| Informed written consent | Each affected client gives informed written consent |
The 30-Day Rule
Written consent must be obtained within 30 days of the practitioner discovering the conflict.
What "Informed" Means:
- Explain the nature of the conflict.
- Explain the potential risks.
- Explain that the client can refuse consent.
- Explain the consequences of consent (continued representation).
The 36-Month Retention Rule
Conflict consent records must be retained for 36 months after the conclusion of representation.
| Record | Retention Period |
|---|---|
| Written conflict consent | 36 months after representation ends |
| Related correspondence | 36 months after representation ends |
| IRS can request | Must provide upon IRS request |
Conflicts That Cannot Be Waived
Some conflicts are so severe that no waiver is possible:
- Representation would violate law.
- Practitioner cannot reasonably believe competent representation is possible.
- Clients' interests are fundamentally incompatible.
Real-World Scenario
Scenario: You represent a married couple. They are divorcing, and both want you to continue representing them in their separate audits for the same tax year.
- Conflict? Yes—their interests in allocating income/deductions are directly adverse.
- Can you continue? Only if both provide informed written consent within 30 days. Even then, you should carefully evaluate whether competent representation is possible.
- Best Practice: Often better to withdraw from representing one or both.
On the Exam
Expect 2-3 questions on conflicts, typically:
- Identification Questions: "Which situation represents a conflict of interest?"
- Waiver Questions: "Within how many days must written consent be obtained?"
- Retention Questions: "How long must conflict consent records be retained?"
The key is to remember: Adverse or materially limited = conflict. Written consent within 30 days. Retain 36 months.
How long must conflict consent records be retained?
Within how many days must written conflict consent be obtained?
Which situation represents a conflict of interest?