WASHINGTON — Internal Revenue Service auditors will no longer able to conclude there is automatic conflict of interest when lawyers who served as bond counsel in a transaction represent the issuer before the IRS in an examination of the bonds.
This is the gist of interim guidance that IRS tax-exempt bond office director Rebecca Harrigal recently provided to agency officials about revised procedures to be incorporated into the Internal Revenue Manual for addressing lawyers' conflicts of interest during audits. The manual is used by field agents.
The interim guidance is effective immediately and stems from the IRS Office Professional Responsibility's concerns about previous conflict of interest procedures.
The new interim guidance was praised by bond lawyers for its substance and its style.
"It's short, it's direct, it covers the issues very well and it's understandable," said Chas Cardall, a partner at Orrick, Herrington & Sutcliffe LLP in San Francisco.
"The bottom line is, this is good news. I'm glad to see it," said Perry Israel, a bond lawyer who has his own firm in Sacramento, Calif.
Under the earlier guidance, if a lawyer served as bond counsel on a deal and then also represented the issuer in an audit of the bonds, the lawyer was automatically seen as having a conflict of interest at the onset of the audit. As a result, the lawyer had to go to its clients and get a conflict of interest waiver that he or she would then have to provide to IRS examiners.
Bond lawyers said that practice was problematic because attorneys do not necessarily have a conflict of interest if they are involved both in the transaction and the audit.
Typically, if there's an issue with the bonds under examination, the problem occurred as a result of something the issuer did after the sale, Cardall said.
If the issuer and bond counsel don't think there is an issue that creates a conflict of interest, then a waiver cannot be obtained, Israel said. A waiver can only be given after an informed conversation about the conflict, which can't take place if neither party sees a conflict, he said.
Under the old procedures, some attorneys were providing IRS examiners with conflict of interest waivers, and some were sending letters saying that no conflict exists at this point, but that if there is a conflict later on, they will send in a waiver or withdraw from representation, Israel said.
"TEB, by requiring the conflict waiver, was creating an atmosphere of potential distrust between issuers and their bond counsel," Israel said. For the last couple of years, OPR director Karen Hawkins, has been saying that the existing IRM provision needed to be changed because it didn't reflect the rules that govern attorney behavior in the states, according to bond lawyers.
At the National Association of Bond Lawyers' Bond Attorneys' Workshop in September, Hawkins said, "I think it's premature to be asking people for a conflict letter the minute they walk in the door. You have to kind of wait until you see a conflict."
OPR and TEB reached an agreement on the final version of new conflict-of-interest procedures not long before the NABL conference, she said.
Under the new guidance, if an examiner believes that a lawyer has a conflict of interest, the IRS agent should raise the issue with the attorney and request that he or she act to address it.
The matter can be treated as concluded if the examiner is persuaded by the lawyer that there is no conflict of interest, if the conflict has been waived, or if the lawyer withdraws from representation and rescinds the power of attorney, according to the guidance.
If there is a need for a waiver, the lawyer will get one from the client, but will not normally shown it to the IRS examiner, Harrigal said in the guidance. Instead, the lawyer will send the examiner a letter or other signed document stating that the waiver has been obtained.
If a conflict of interest is not resolved or IRS examiners or group managers have concerns, OPR should be contacted, according to the guidance.
Cardall said it's important that IRS examiners not receive the waivers because these documents indicate what the lawyers representing issuers in audits are concerned about.
Bradley Waterman, a tax-controversy lawyer, said that just requiring a written assurance that the conflict has been addressed and resolved "is consistent with general IRS practice — absent unusual circumstances, the IRS deals with the taxpayer's duly- appointed representative, not the taxpayer itself."
Waterman added that the guidance leaves open one question. "The new provision assumes that there is an actual conflict and it does not explain how — or whether — TEB personnel should address a potential conflict," he said.
