Conflicting interests and return of client records: sections 10.29 and 10.28

• Identify the two kinds of conflict of interest defined in section 10.29(a)
• Apply the three conditions under which a conflicted representation may proceed
• Determine which documents count as client records under section 10.28(b)
• Explain how state law on fee disputes changes the return-of-records duty

Section 10.29: what a conflict is

A practitioner may not represent a client before the IRS if the representation involves a conflict of interest, unless the exception in 10.29(b) is met. Under 10.29(a) a conflict exists if:

1. the representation of one client will be directly adverse to another client; or
2. 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.

Common tax practice examples:

• Spouses who are divorcing, where one seeks innocent spouse relief that shifts liability to the other.
• Partners in a partnership where one partner is disputing an allocation that benefits another partner the firm also serves.
• A business and its owner, where the firm learns the owner may be personally liable for unpaid payroll taxes.
• A personal interest, such as a practitioner who invested in the same transaction the client is asking about.

When you may proceed: 10.29(b)

Despite a conflict, the practitioner may represent the client if all three conditions are met:

1. the practitioner reasonably believes they can 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 practitioner knows of the conflict. The written confirmation may follow within a reasonable period after the informed consent, but no later than 30 days.

Under 10.29(c) the practitioner must keep copies of the written consents for at least 36 months from the date the representation of the affected clients concludes, and must provide them to the IRS on request.

Two traps for staff. First, the timing runs from when the practitioner knows of the conflict, not from when the engagement letter is next updated. Second, every affected client must sign; a consent from only one spouse does not meet the rule.

Section 10.28: return of client records

At the client's request a practitioner must promptly return any and all records of the client that are necessary for the client to comply with federal tax obligations. The practitioner may keep copies.

A fee dispute generally does not relieve the practitioner of this duty. If applicable state law permits a practitioner to retain a client's records in a fee dispute, the practitioner need only return the records that must be attached to the client's return, but must give the client reasonable access to review and copy any other retained records needed for federal tax compliance.

What counts as a record

Section 10.28(b) defines records of the client to include:

• all documents or written or electronic materials provided to the practitioner, or obtained during the representation, that preexisted the retention (W-2s, 1099s, bank statements, prior returns);
• materials prepared by the client or a third party (not the practitioner's employee or agent) at any time and provided to the practitioner on the subject of the representation;
• any return, claim, schedule, affidavit, appraisal or other document the practitioner prepared and presented to the client in a prior representation, if needed for the client's current federal tax compliance.

Records do not include a return, claim, schedule or other document the practitioner's firm prepared that the practitioner is withholding pending the client's payment of fees for that document. Workpapers that are the practitioner's own work product are not listed as client records.

The client disengagement letter template sets out records being returned and the date, which is the evidence you met 10.28.

Divorce and a fee dispute: the Barrett household