Conflicts of interest in tax practice: Circular 230 §10.29

Look beyond two clients arguing

Direct adversity is one route to a conflict. A significant risk of material limitation also matters: responsibilities to a former client, a third party or the practitioner’s own financial interest can interfere with the engagement. Reassess when the facts change instead of treating an initial engagement letter as permanent clearance.

Direct adversity and material limitation are different tests

Direct adversity arises when representing one client is directly adverse to another client. Material limitation concerns a significant risk that duties to another client, a former client or a third person, or the practitioner’s own interests, will limit the representation. The second category can exist even when two clients are not openly arguing. Ask whether the practitioner can give each affected client the advice and advocacy the matter requires.

For example, two owners may initially agree that the business should resolve unpaid payroll taxes. Their positions can separate when the inquiry turns to who controlled payments and knew the taxes were unpaid. A practitioner’s financial interest can also matter: advice about a transaction may be constrained if the practitioner benefits from the client choosing it. Identify the source of the limitation instead of treating shared business ownership as proof either that a conflict always exists or that it never can.

Consent comes after the permissibility assessment

The exception in section 10.29 requires all three conditions. The practitioner must reasonably believe competent and diligent representation can be provided to each affected client; the representation must not be prohibited by law; and every affected client must give informed consent confirmed in writing. A signed waiver establishes none of the other conditions on its own. If adequate representation cannot reasonably be provided, the analysis stops before seeking signatures.

Informed consent requires more than the phrase "we understand there may be a conflict." Explain the nature of the competing interests and how they could affect the work so the client can evaluate the choice. A hypothetical family relationship without competing positions is not the same as one spouse seeking relief by attributing responsibility to the other. Read the exact engagement and facts. The exam often tests whether consent is being used to bypass an earlier condition that has already failed.

Document the decision and use the correct retention trigger

When representation is permissible and each affected client consents, record who consented, the matter involved, the conflict explained and the confirmation date. Section 10.29 requires written confirmation at the time of consent, or promptly thereafter, and in no event later than 30 days after consent. That timing rule is separate from the retention period and does not permit starting the work when the substantive conditions cannot be met.

Keep the written consents for at least 36 months after the affected representation concludes and make them available to the IRS on request. A consent signed near the start of a long engagement may therefore need to be kept much longer than three years after signature. An editorial file checklist can connect the original assessment, written confirmation and engagement closing date so each clock is visible. The detailed recordkeeping lesson covers the different clocks for other document categories.

Reassess when the clients’ positions change

Conflict screening is not just an intake form. New facts can change who is adverse to whom, the advice each client needs or the practitioner’s ability to act diligently for everyone. When that happens, revisit the conditions before continuing the affected work. The fact that two clients signed an earlier consent does not prove that a materially changed engagement still satisfies the rule.

Separate the question of continued representation from practical transition work. Identify deadlines, protect records and consider what each client needs to arrange appropriate representation. Do not imply that ending one engagement automatically removes duties concerning information already obtained. For an exam response, state the new conflict, test permissibility, and then address consent or the need to decline or withdraw as the facts require. "They already signed" is not a complete analysis.