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When a Conflict of Interest Exists

Feb 2nd 2018
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Let’s say that you do a tax return, or otherwise represent an S Corporation or partnership, comprised of two unrelated parties. Those parties then ask you to do their personal returns. The conflict arises when one partner wants to do something on their tax return that is contrary to what the other partner wants to do, each affecting the other partner.

Another conflict of interest arises when you represent a married couple. The couple goes through a nasty divorce, and both come to you to prepare their tax return. Both parties present you with documentation stating that they can take the children as dependents on opposite years, and both are adamant that this year is the year they can take the dependent.

For the partners, you have an option. You can disclose to them in writing that representing them personally may present a conflict. Have them both sign it, and you are fine. The only option that I have found with the married couple is to size up which one can pay your bill and represent them.

We are all in this to make money. However, in both examples given above, everything is going fine until it is not. In the case of the partnership or S Corporation, let’s say that one partner wants to take an aggressive stand on some issue and the other partner doesn’t. They approach you to ask what your thoughts are. You explain the law, and it is counter to what one of the partners wants. You could very well lose your job. Even worse, let’s say that one partner approaches you and wants you to be a little more aggressive. In them wanting you to be aggressive, you aren’t breaking any laws. So, you are aggressive. But the other partner is uncomfortable with it and reports you to the Office of Professional Responsibility. Now you have an ethics violation.

Conflicts can arise in the simplest of situations. For example, let’s say that you are retained to give tax advice for a partnership or S Corporation. The advice you give favors only one of the partners or shareholders. The other one isn’t affected by the advice. However, in taking it the other partner or shareholder will have to completely change the way they do things, in order for the other partner or shareholder to benefit. For this engagement, you are being hired by the S Corporation or the partnership and not the individual shareholders or partners. In this situation, you have only benefited one shareholder, and the other one now has to change the way they do things so that shareholder can benefit.

If there is any chance that a conflict exists, it is important to disclose that a conflict may exist, in writing, and keep that document with the client’s permanent file.

There are some conflicts that you should never touch. For instance, the husband and wife. However, with partners, as long as you disclose in writing that a conflict may exist, then you are fine. One thing to keep in mind about partnerships is that very few work out. Meaning there is a blow up, and the partners are looking to blame ANYONE.

How do you disclose a conflict? Very simply. First go to your E&O insurance company and explain that a conflict may exist. They will probably have a form letter that you can use. If not, search the internet, and you will find tons of letters. Tailor them to your specific needs, and you are good.

The point is that when these partnerships break up, they are going to be looking for someone to blame. As long as you have disclosed that there was a potential conflict, you will be fine.

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