Professional standards and their limits | Research Credit Integrity Alliance

Key points

Circular 230 generally prohibits a practitioner from charging a contingent fee for services in connection with any matter before the IRS, and its definition of a contingent fee includes a fee based on a percentage of a refund.1
Circular 230 also sets duties of diligence, competence and care in the positions a practitioner takes on returns and claims for refund.234
In 2014 a federal court held that the IRS lacked authority to regulate the preparation and filing of ordinary refund claims, and so could not apply the Circular 230 contingent fee rule to them.5
The AICPA Code prohibits members in public practice from preparing an original or amended return or claim for a tax refund for a contingent fee, but it binds AICPA members only.67
Statutory preparer penalties under the Internal Revenue Code apply to paid preparers whether or not they hold a professional credential.89

Two sets of rules with different reach

People who prepare federal research credit claims for a fee can be subject to two kinds of professional rule. The first is Treasury Department Circular No. 230, the regulations at 31 CFR Part 10 that govern practice before the IRS.10 The second is the code of conduct of a professional body, of which the most relevant in the United States is the Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA).7

Both sets of rules address contingent fees for tax work. Neither reaches everyone who prepares a research credit claim. Understanding where each rule applies, and where it stops, is necessary background to any discussion of how research credit advisers are paid.

This article describes the rules in general terms. It does not describe the practice of any adviser.

What Circular 230 says about contingent fees

Section 10.27 of Circular 230 deals with fees. It contains two rules.

The first is that a practitioner may not charge an unconscionable fee in connection with any matter before the IRS.1

The second is a general prohibition on contingent fees. Except as the section provides, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS.1 A "matter before the Internal Revenue Service" is defined to include tax planning and advice, and preparing or filing, or assisting in preparing or filing, returns or claims for refund or credit.1

The definition of a contingent fee is broad. It is any fee that is based, in whole or in part, on whether a position taken on a return or other filing avoids challenge by the IRS or is sustained by the IRS or in litigation. It expressly 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 It also includes an arrangement under which the practitioner will reimburse all or part of the client's fee if a position is challenged or not sustained, whether through an indemnity agreement, a guarantee, rescission rights or any similar arrangement.1

There are three exceptions. A practitioner may charge a contingent fee for services in connection with:

the IRS's examination of, or challenge to, an original return, or an amended return or claim for refund or credit filed within 120 days of the taxpayer receiving written notice of the examination of, or a written challenge to, the original return;1
a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the IRS;1 and
any judicial proceeding arising under the Internal Revenue Code.1

The section applies to fee arrangements entered into after March 26, 2008.1 Treasury later explained that the rule was intended to restrict contingent fee arrangements because of their potential to encourage practitioners and their clients to take aggressive positions in the hope that they will not be audited.11

Diligence, competence and standards for returns

Circular 230 also sets standards for the quality of a practitioner's work. Three provisions are relevant to research credit claims.

Due diligence. Section 10.22 requires a practitioner to exercise due diligence in preparing or assisting in the preparation of, approving, and filing tax returns and other papers relating to IRS matters, and in determining the correctness of representations made to Treasury and to clients.2 A practitioner is presumed to have exercised due diligence when relying on the work product of another person, if the practitioner used reasonable care in engaging, supervising, training and evaluating that person.2

Standards for returns. Section 10.34 provides that a practitioner may not willfully, recklessly or through gross incompetence sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that lacks a reasonable basis, or that is an unreasonable position as described in section 6694(a)(2) of the Code.3 The same standard applies to advising a client to take such a position or preparing a portion of a return or claim containing it.3 A practitioner may generally rely in good faith on information furnished by the client, but may not ignore the implications of information furnished or actually known, and must make reasonable inquiries if the information appears incorrect, inconsistent or incomplete.3 A practitioner must also inform a client of any penalties reasonably likely to apply to a position the practitioner advised on, or on a return the practitioner prepared or signed.3

Competence. Section 10.35 requires a practitioner to possess the necessary competence to engage in practice before the IRS, meaning the appropriate level of knowledge, skill, thoroughness and preparation for the matter.4

Section 10.36 adds a firm-level duty. Individuals with principal authority for overseeing a firm's practice must take reasonable steps to ensure the firm has adequate procedures in place for complying with Circular 230.12

Who Circular 230 reaches

Circular 230 applies to "practitioners". The regulations define a practitioner as an individual described in section 10.3: attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents and registered tax return preparers who are not under suspension or disbarment.1013 The regulations also state that a tax return includes an amended tax return and a claim for refund.10

Section 10.8 extends the duties in Circular 230 to individuals who, for compensation, prepare or assist with the preparation of all or substantially all of a tax return or claim for refund.14

Treasury's authority for these rules comes from 31 U.S.C. 330, which allows the Secretary of the Treasury to "regulate the practice of representatives of persons before the Department of the Treasury."15 That wording has proved to be the key limit.

The limit set by the courts

In 2011 Treasury and the IRS issued regulations that required paid tax return preparers to become registered tax return preparers subject to Circular 230.11 Those rules were challenged. The courts held that Treasury and the IRS lacked statutory authority under 31 U.S.C. 330 to regulate tax return preparation as practice before the IRS, and the D.C. Circuit explained that, while tax return preparers assist taxpayers, they do not represent taxpayers before the IRS or formally act as their agent (Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014)).11

A second case applied that reasoning to contingent fees. A certified public accountant challenged the IRS's authority to apply section 10.27 to "Ordinary Refund Claims", which the court described as refund claims filed after a taxpayer has filed the original return but before the IRS has begun an audit.5 The court concluded that the IRS lacks statutory authority to regulate the preparation and filing of those claims, granted summary judgment to the plaintiff, and granted a permanent injunction (Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014)).511

Treasury has since summarized the effect of that decision: the IRS cannot prohibit charging contingent fees for ordinary refund claims based on its authority to regulate practice before the IRS under 31 U.S.C. 330(a), and the court did not otherwise address the propriety of contingent fees.11

In December 2024 Treasury and the IRS proposed to remove section 10.27 and instead define, as disreputable conduct, charging a contingent fee in connection with the preparation of an original or amended tax return or claim for refund or credit prepared before the examination of the return.11 Treasury relied for that proposal on its authority under 31 U.S.C. 330(c) to sanction practitioners for disreputable conduct.11 The notice stated that these circumstances encourage evasion or abuse of federal tax law by incentivizing practitioners to take unduly aggressive positions that increase their clients' reported tax benefits.11 The eCFR text of section 10.27 current to 6 October 2026 is still the version adopted in 2007.1

Even if adopted, a rule of that kind would apply to practitioners, because the sanctions in 31 U.S.C. 330 are directed at representatives who practice before Treasury.15

What the AICPA Code covers

The AICPA Code of Professional Conduct contains its own Contingent Fees Rule. A member in public practice shall not prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.6

The Code defines a contingent fee as a fee established under an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent on the finding or result.6 For tax matters, fees are not regarded as contingent if determined based on the results of judicial proceedings or the findings of governmental agencies.6

An interpretation of the rule explains how that works for tax services. A fee is treated as based on the findings of a governmental agency, and so not contingent, only if the member can demonstrate a reasonable expectation, at the time of the fee arrangement, that a government agency will provide substantive consideration of the subject matter.16 The interpretation lists examples in which a contingent fee is permitted, including representing a client in a revenue agent's examination and filing an amended return claiming a refund greater than the threshold for review by the Joint Committee on Taxation.16 It gives, as an example of a fee that is not permitted, preparing an amended return claiming a refund because a valid deduction was inadvertently omitted from the original return.16 It also reminds members that when practicing before the IRS or other taxing authorities they should comply with any other applicable and more restrictive requirements.16

The Code binds AICPA members. Its preface explains that the term member includes members, associate members, affiliate members and international associates of the AICPA.7

What neither set of rules covers

Taken together, these sources show where the professional rules stop.

People who are not practitioners or AICPA members. The IRS describes a category of paid preparers who hold a preparer tax identification number but no professional credentials and do not take part in the Annual Filing Season Program. They are authorized to prepare tax returns, and they have no authority to represent clients before the IRS except for certain older returns.17 The AICPA Code does not bind them unless they are AICPA members.7
Ordinary refund claims. Since 2014 the Circular 230 contingent fee rule cannot be applied, on the basis of Treasury's practice authority, to the preparation and filing of refund claims filed before an audit begins.511 For a business claiming a research credit it missed, that is the usual route.
Original returns, for non-practitioners. The courts have held that preparing returns is not practice before the IRS.11 Professional rules that depend on practice authority do not reach a preparer who is not otherwise a practitioner.

The statutory backstop: preparer penalties

The Internal Revenue Code contains penalties that do not depend on professional status. They apply to any "tax return preparer", which the Code defines as any person who prepares for compensation, or employs one or more persons to prepare for compensation, any return of tax or any claim for refund. Preparing a substantial portion of a return or claim counts as preparing it.9

Under section 6694(a), a tax return preparer who prepares a return or claim for refund with an understatement due to an unreasonable position, and who knew or reasonably should have known of the position, must pay a penalty for each return or claim equal to the greater of $1,000 or 50 percent of the income derived, or to be derived, by the preparer from it.8 For willful or reckless conduct, section 6694(b) sets the penalty at the greater of $5,000 or 75 percent of that income.8

These penalties are measured partly by the preparer's own income from the return or claim. They sit alongside, and do not replace, any professional rules on how that income is earned.

Our position

Our position is that the limits described above are a reason for Congress to act. Treasury's contingent fee rule rests on its authority to regulate practice before the IRS, and the courts have held that this authority does not extend to preparing returns or ordinary refund claims. Professional body codes bind only their members. A prohibition on contingent fees in federal research credit engagements under Section 41, enacted by Congress, would apply to every adviser paid to prepare or support a claim, whatever their credential. Swanson Reed, the publisher of this site, is a fixed-fee R&D tax adviser and has a direct commercial interest in this outcome. See Our position and Recommendations.

For how these rules apply to refund claims in particular, see Amended and refund claims. For who may prepare claims in other countries, see Unregulated claim preparers.

Sources

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (a), (b)(1) to (b)(4), (c)(1), (c)(2) and (d) (eCFR text current to 6 October 2026). 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 10.22, Diligence as to accuracy, paragraphs (a) and (b). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.22 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.34, Standards with respect to tax returns and documents, affidavits and other papers, paragraphs (a)(1), (c)(1) and (d). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.34 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.35, Competence, paragraph (a). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.35 (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 to 3, 8 to 9 and 14 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
American Institute of CPAs, Code of Professional Conduct (updated for all official releases through July 2026), ET 1.510.001, Contingent Fees Rule, paragraphs .01b and .03. Copy published by the Minnesota Board of Accountancy: https://mn.gov/boa/assets/AICPA%20Code%20of%20Professional%20Conduct_tcm1233-764395.pdf (accessed 11 October 2026). Back
American Institute of CPAs, Code of Professional Conduct (updated for all official releases through July 2026), ET 0.200.020, Application of the AICPA Code, paragraphs .02 and .03. Copy published by the Minnesota Board of Accountancy: https://mn.gov/boa/assets/AICPA%20Code%20of%20Professional%20Conduct_tcm1233-764395.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6694, Understatement of taxpayer's liability by tax return preparer, subsections (a)(1) and (b)(1) and (2), 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-subchapB-partI-sec6694.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 7701, Definitions, subsection (a)(36)(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-chap79-sec7701.htm (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.2, Definitions, paragraphs (a)(4), (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 and Internal Revenue Service, Regulations Governing Practice Before the Internal Revenue Service, notice of proposed rulemaking, 89 FR 104915 (26 December 2024), Background parts A and B, Explanation of Provisions part B, and proposed section 10.51. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.36, Procedures to ensure compliance, paragraph (a). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.36 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.3, Who may practice, paragraphs (a) to (f). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.3 (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
Office of the Law Revision Counsel, 31 U.S.C. 330, Practice before the Department, subsections (a) and (c), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title31/html/USCODE-2024-title31-subtitleI-chap3-subchapII-sec330.htm (accessed 11 October 2026). Back
American Institute of CPAs, Code of Professional Conduct (updated for all official releases through July 2026), ET 1.510.010, Tax Matters, paragraphs .01 to .05. Copy published by the Minnesota Board of Accountancy: https://mn.gov/boa/assets/AICPA%20Code%20of%20Professional%20Conduct_tcm1233-764395.pdf (accessed 11 October 2026). Back
Internal Revenue Service, Understanding tax return preparer credentials and qualifications (page last reviewed or updated 29 January 2026). https://www.irs.gov/tax-professionals/understanding-tax-return-preparer-credentials-and-qualifications (accessed 11 October 2026). Back

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