Conflict of Interest?

[KBTS]

A married couple has been my clients for several years now. They split in late 2006 and were getting a divorce. They decided to file MFJ for 06, figuring the divorce would be final in 2007 and they would go their separate ways. Well, the divorce is not final yet so the wife called a couple of weeks ago to have me prepare her return. She figured her husband had already filed, so she filed MFS.

Today, the husband calls and says he would like to set up an appointment. He spoke to his wife and knew she had already had me prepare her return. He said he had no problem with me preparing his return and knew he would have to file MFS. I asked him if it was OK to call him back to schedule.

Seems to me there can only be bad things happen from getting in the middle of this. Should I call back and politely doing his return citing a conflict of interest? I'm sure others on the board have had this situation before - it's my first one!

[Possi]

Both

I will do both returns as long as the client wants me to do it. Over time, one or the other will find another preparer.

~possi

[jimmcg]

If you do both returns it can very well be a conflict of interest or at a minimum give the appearance of a conflict of interest. Been there and done that. If you proceed with praparing both returns make sure your malpractice premiums are up to date.

[Gretel]

If you don't feel comfortable with the situation then don't do his return. Should you decide to to his tax return after all get in writing from both that there is a potential conflict of interest and that both agree you do their tax returns.

[Bees Knees]

We had this a year and a half ago in our Ethics debate.

NAEA Rules of Professional Conduct, Rule 6, “Members and associates will advise all appropriate parties of potential conflicts.”

Circular 230, Section 10.29(a) states that a practitioner shall not represent a client in his or her practice before the IRS if the representation involves a conflict of interest. Circular 230 goes on to say the practitioner may represent a client if, among other requirements, “each affected client gives informed consent, confirmed in writing.”

Preparing MFS returns for each spouse in a divorce situation is most certainly a conflict of interest. If you do not want to be sued, and/or disbarred from practice before the IRS, you need to inform both couples in writing you are preparing the other spouse's return and you need to get permission from each in writing that they are fine with that.

[ChEAr$]

Preparation

We had this a year and a half ago in our Ethics debate.

NAEA Rules of Professional Conduct, Rule 6, “Members and associates will advise all appropriate parties of potential conflicts.”

Circular 230, Section 10.29(a) states that a practitioner shall not represent a client in his or her practice before the IRS if the representation involves a conflict of interest. Circular 230 goes on to say the practitioner may represent a client if, among other requirements, “each affected client gives informed consent, confirmed in writing.”

Preparing MFS returns for each spouse in a divorce situation is most certainly a conflict of interest. If you do not want to be sued, and/or disbarred from practice before the IRS, you need to inform both couples in writing you are preparing the other spouse's return and you need to get permission from each in writing that they are fine with that.

of such tax returns is NOT a conflict of interest as long as there ARE no conflicts evident.
Remember, this is not a representation situation.

If I do prepare returns for each spouse, I may not divulge any information on the other spouse
of course, and only if a conflict arise must I withdraw from preparation of the other one.

Of course I'm not in a community property state, so thing might get a little sticky in such
"communistic" states.

[Bees Knees]

Tax preparation IS considered representation in Circular 230.

Conflicts ARE evident in any MFS situation. One taxpayer always pays more tax than they would doing MFJ, unless the combined tax on the two MFS returns equal the MFJ return.

That in itself is a conflict of interest. You need permission from both in writing.

[S T]

Issue

I had an issue with this last year, and I have another one this year.

So I add a couple of extra lines to my engagement letter, and each party receives it and signs and initials , acknowledging that they know that I am preparing both returns for Tax Year 20XX, and they understand that it could be a conflict of interest, and authorize me to prepare their (as in Jane Doe) return or (John Doe) return.

Sandy

[jasdlm]

Why don't you amend wife's return and file MFJ? They would probably appreciate saving the money. You could still do an analysis (for a fee) telling them how much each of them 'owed' based on their respective income/deductions. This would also help with your COI problem.

I'm tired; I'm probably missing something, but that's what I would do.

[Bees Knees]

Why don't you amend wife's return and file MFJ? They would probably appreciate saving the money. You could still do an analysis (for a fee) telling them how much each of them 'owed' based on their respective income/deductions. This would also help with your COI problem.

This illustrates the conflict of interest.

You as a tax preparer understand that if they could just get along and file MFJ, their combined tax liability would be less. This would help the one who otherwise would have paid more tax individually MFS.

However, the other spouse may not save much, if anything, and now you are suggesting the less affected spouse sign a joint return and take on joint liability with a person he or she is divorcing.

Tax savings is only part of the picture. When there is a divorce, you also need to consider separating liability issues.

For example. Say you convince them both that MFJ will save money, and they both agree. They jointly sign and take on joint liability. Two years later after the divorce, the IRS discovers un-reported income. The innocent spouse knew nothing of this, and her ex is no where to be found, as they are divorced and all communication has stopped. IRS tries to collect the tax from her.

Yes there are innocent spouse rules that may get her out of the liability (or maybe not), but you should not have put her in that situation to begin with, as she would have trusted you to understand that could have been an issue. You now have to do all kinds of free tax work to get her out of the legal mess she is in because of your bad advice.

[ChEAr$]

Please point that out in circular 230

Tax preparation IS considered representation in Circular 230.

Conflicts ARE evident in any MFS situation. One taxpayer always pays more tax than they would doing MFJ, unless the combined tax on the two MFS returns equal the MFJ return.

That in itself is a conflict of interest. You need permission from both in writing.

about preparation being "considered" rep work.

[Bees Knees]

§ 10.0 Scope of part.
This part contains rules governing the recognition of attorneys, certified public
accountants, enrolled agents, and other persons representing taxpayers before the Internal Revenue Service. Subpart A of this part sets forth rules relating to the authority to practice before the Internal Revenue Service; Subpart B of this part prescribes the duties and restrictions relating to such practice; Subpart C of this part prescribes the sanctions for violating the regulations; Subpart D of this part contains the rules applicable to disciplinary proceedings; and Subpart E of this part contains general provisions including provisions relating to the availability of official records.

Note that the scope of Circular 230 has to do with practice before the IRS.

§ 10.2 Definitions…

(d) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, and representing a client at conferences, hearings, and meetings.

Note that the definition of practice is not limited to what is mentioned in that paragraph. Circular 230 then proceeds to mention preparing and signing tax returns over a dozen times and provides regulations governing the preparation of tax returns. If the scope of Circular 230 has to do with practice before the IRS and Circular 230 is loaded with rules governing the preparation of tax returns, how can you say preparing tax returns does not fall within the scope of practice?

[LawrenceGR]

Does this

only pertain to divorced couples? I have, coming in next week, a newly wed couple where the husband is in the mist of a OIC payment plan. Their request is for me to do them both as MFS. I have to say that I don't know much about OIC's but I suggested we look at filing MFJ if it works better . He told me it doesn't matter how much of a refund or lower tax liability he ends up with he still has to make the payments. Ant thoughts here?

[ChEAr$]

I have no truck

with your explantion of what constitutes practice before the IRS.

Our only concern though is whether there might be a conflict in the case of a couple
electing to file separately. Each has that right and as long as there are no conflicts,
I may prepare each return. Only if one spouse wanted to take one position contrary to
that on the other return would I then have to refuse to do the return.

But hey, if they both agree, I have no problem or qualms with doing the work.

And nothing IRS has written anywhere forbids that.