How success fees work | Research Credit Integrity Alliance

Key points

A success fee, or contingent fee, is a fee whose amount depends on the result. In R&D tax credit work, the result can be the size of the credit.
Treasury's rules for tax practitioners define a contingent fee broadly. The definition includes a fee based on a percentage of a refund, a fee based on taxes saved, and an arrangement to refund the fee if the IRS challenges the position.1
The same rule generally prohibits practitioners from charging contingent fees for matters before the IRS, with four exceptions.1
The rule applies to practitioners, such as attorneys, certified public accountants and enrolled agents. It does not set fee levels, and a 2014 federal court decision held that the IRS lacked authority to apply it to the preparation and filing of ordinary refund claims.234

What a success fee is

When a business hires an adviser to prepare a federal research credit claim under Section 41 of the Internal Revenue Code, the adviser has to be paid somehow. Broadly, there are two ways to set the price. The first prices the work: an hourly rate, a fixed fee for a defined scope, or a capped fee. The second prices the outcome: the adviser takes a share of the credit the claim produces. The second approach is what people mean by a success fee or a contingent fee.

Federal rules for tax practice use the term "contingent fee" and define it in Treasury Department Circular No. 230, the regulations that govern practice before the IRS. Under that definition, a contingent fee is any fee "based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge" by the IRS or is sustained by the IRS or in litigation.1 The definition goes on to say that a contingent fee includes a fee based on a percentage of the refund reported on a return, a fee based on a percentage of the taxes saved, and a fee that "otherwise depends on the specific result attained".1

This article describes, in general terms, the building blocks of these arrangements and the federal rule that touches them. It does not describe any particular adviser's terms, and it does not say how common any arrangement is. Our sourced analysis is in the white paper Contingent fees in R&D tax credit claims.

The building blocks of an arrangement

An engagement letter that sets a success fee has to answer a few questions. The answers vary from one arrangement to another. The list below explains what each question means for the business that signs.

What the percentage is applied to

The most important term is the base: the number the percentage is multiplied by. A fee can be calculated on the credit as claimed, meaning the amount shown on the return or refund claim when it is filed. It can instead be calculated on the credit as allowed, meaning the amount that survives any IRS review. An arrangement can use a different base again, such as the cash actually received or the tax actually saved in a given year.

The difference matters most when a claim is reduced later. A fee calculated on the amount claimed is fixed at filing. A fee calculated on the amount allowed moves down if the credit moves down.

When the fee is paid

Timing is a separate question from the base. A fee may be payable when the claim is filed, when a refund arrives, when the credit is used against tax, or in stages. A credit that is carried forward rather than used at once can make timing complicated, because the benefit to the business may arrive over several years while the fee falls due earlier.

What happens if the claim is reduced

An arrangement may say nothing about this, or it may include a term under which the adviser repays part or all of the fee if the IRS disallows part or all of the credit. Such terms are often called clawback, refund or fee protection clauses.

Under Circular 230, a promise of that kind is itself treated as a contingent fee. The definition expressly includes "any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client's fee" if a position is challenged by the IRS or is not sustained, whether through "an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect".1 So a refund promise does not take an arrangement outside the federal definition. It is one of the ways the definition is met.

Hybrid arrangements

A fee design can combine elements. A hybrid arrangement might pair a fixed fee for the study with a percentage of the credit, or set a percentage with a minimum fee, a maximum fee, or both. A cap limits how much the fee can rise with the claim. A minimum fee means the adviser is paid something even if the credit is small. Whether a hybrid counts as a contingent fee under Circular 230 depends on its terms, because the definition reaches a fee based "in whole or in part" on the result.1

A worked example (illustrative only)

The figures below are invented round numbers to show how the base and refund terms interact. They do not describe any real engagement.

Suppose a business claims a federal research credit of $100,000 and has agreed to pay its adviser 20 percent of the credit claimed. The fee is $20,000, payable when the claim is filed.

Now suppose the IRS later allows only $60,000 of the credit.

If the fee was based on the credit as claimed and the letter contains no refund term, the fee stays at $20,000. Measured against the credit the business keeps, the adviser has received one third of it.
If the fee was based on the credit as allowed, the fee falls to $12,000, and $8,000 is either never charged or repaid, depending on when the fee was paid.
If the fee was based on the amount claimed but the letter promises a refund of fees on disallowed amounts, the result depends on the refund clause, how it is triggered and whether the adviser is still in a position to pay.

In each case the $40,000 of disallowed credit is tax the business owes. Interest on unpaid tax is payable by law,5 and in some cases a penalty of 20 percent of the underpayment can be added.6 That is explained in Who bears the risk of an overclaim.

The federal rule: Circular 230, section 10.27

Section 10.27 of Circular 230 is the federal rule on fees charged by tax practitioners. It is short, and it does three things.

It bans unconscionable fees

First, a practitioner "may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service".1 The rule does not define a percentage or amount that would be unconscionable.

It generally prohibits contingent fees

Second, except as the rule itself provides, a practitioner "may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service".1 The phrase "matter before the Internal Revenue Service" is defined widely. It includes tax planning and advice, and "preparing or filing or assisting in preparing or filing returns or claims for refund or credit".1 Circular 230 also says that, unless the text provides otherwise, a tax return includes an amended tax return and a claim for refund.2

The rule applies to fee arrangements entered into after March 26, 2008.1

It allows four exceptions

Third, the rule lets a practitioner charge a contingent fee in four situations:1

For services in connection with the IRS's examination of, or challenge to, an original tax return.
For services in connection with the IRS's examination of, or challenge to, an amended return or claim for refund or credit, where that amended return or claim was filed within 120 days of the taxpayer receiving a written notice of examination of, or a written challenge to, the original return.
For a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the IRS.
For services in connection with any judicial proceeding arising under the Internal Revenue Code.

Read together, these exceptions mostly concern work done after the IRS has already raised a question: defending a return under examination, or litigating. Preparing a research credit claim in the first place is not one of the listed exceptions.

Who the rule applies to

Section 10.27 governs "practitioners". Circular 230 defines a practitioner by reference to the people listed in its section 10.3, which include attorneys, certified public accountants, enrolled agents and enrolled actuaries who are not suspended or disbarred from practice before the IRS.23

Circular 230 also contains a provision, section 10.8, that applies its practice rules to other individuals who prepare returns or claims for refund for compensation.7 The reach of that provision has been limited by litigation. In 2014 the US Court of Appeals for the District of Columbia Circuit decided Loving v. IRS. A federal district court later described that case as addressing whether the IRS's authority to regulate "the practice of representatives of persons before the Department of the Treasury" extends to tax return preparers, and as holding that the statute's text, history, structure and context "foreclose[d] and render[ed] unreasonable" the IRS's reading.4 Readers should not assume that a person who prepares a research credit claim is bound by Circular 230 simply because they prepared it.

What the rule does not cover

The rule is narrower in practice than its text suggests. Four limits matter for research credit work.

Ordinary refund claims. In Ridgely v. Lew, a certified public accountant challenged the IRS's authority to apply section 10.27 to what the court called "Ordinary Refund Claims": refund claims filed after the original return but before the IRS has started an audit.4 The court concluded that the IRS "lacks statutory authority to regulate the preparation and filing of Ordinary Refund Claims", granted summary judgment to the plaintiff and granted a permanent injunction.4 The text of section 10.27 on the eCFR still reads as quoted above.1 Research credit refund claims, and why they matter, are covered in Amended and refund claims.

People who are not practitioners. The court in Ridgely v. Lew observed that, on the IRS's own view of the rule, the IRS "would impose no contingent fee restrictions on the preparation and filing of Ordinary Refund Claims by non-CPAs and those who never 'practice' before the IRS".4

The amount of a fee. Apart from the bar on unconscionable fees, section 10.27 does not cap fees or require any method of calculating them.1

Disclosure. Section 10.27 does not require a practitioner to tell the IRS how a fee was calculated.1 Other professional codes and state rules may add requirements of their own. Those are covered in Professional standards and their limits.

What this means for a business

The following points are general observations, not findings about any adviser.

The federal definition of a contingent fee is broad, but the federal rule's reach is limited by who the adviser is and by what kind of filing is involved. A business cannot tell from the fee structure alone which rules apply to its adviser.
The base and the refund terms decide who carries the cost of a reduced claim. A fee on the amount claimed, with no refund term, leaves the full fee in place whatever happens to the credit.
A fee refund promise is not the same as protection from the tax consequences. Even a full refund of the fee does not repay the disallowed credit, the interest or any penalty, which are owed by the taxpayer.
Questions worth asking before signing are set out in Information gaps for businesses.

Our position

Swanson Reed, the publisher of this site, is a fixed-fee R&D tax adviser with a direct commercial interest in this debate. Our position is that Congress should prohibit contingent fees in federal research credit engagements under Section 41, so that advisers are paid for the work they perform rather than for the size of the claim. Treasury's rule already treats percentage-of-refund fees and fee refund guarantees as contingent fees. The gaps described above, around refund claims and preparers outside Circular 230, are the reason we think the answer has to come from Congress. See Our position.

Sources

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (a), (b)(1) to (b)(4), (c)(1), (c)(2) and (d). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.27 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.2, Definitions, paragraphs (a)(5) and (a)(6). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.2 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.3, Who may practice, paragraphs (a) to (d). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.3 (accessed 11 October 2026). Back
US District Court for the District of Columbia, Ridgely v. Lew, Civil Action No. 1:12-cv-00565 (CRC), Memorandum Opinion, 16 July 2014, pages 1, 8, 12 to 15. https://www.govinfo.gov/content/pkg/USCOURTS-dcd-1_12-cv-00565/pdf/USCOURTS-dcd-1_12-cv-00565-1.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6601, Interest on underpayment, nonpayment, or extensions of time for payment, of tax, subsection (a), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap67-subchapA-sec6601.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6662, Imposition of accuracy-related penalty on underpayments, subsections (a) and (b), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapA-partII-sec6662.htm (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.8, Return preparation and application of rules to other individuals, paragraphs (a) and (c). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.8 (accessed 11 October 2026). Back

This article discusses fee practices in general terms. It is not a statement about any particular adviser.