The case for reform | Research Credit Integrity Alliance

Key points

Treasury defines a contingent fee to include a fee based on a percentage of a refund or of the taxes saved.1
Treasury has said that its contingent fee rule was intended to restrict arrangements that may encourage aggressive positions taken in the hope of avoiding audit.2
A federal court held in 2014 that the IRS lacked authority to regulate the preparation of ordinary refund claims. Treasury proposed a new rule in 2024, but the eCFR still shows the 2007 rule.321
The AICPA Code prohibits contingent fees for tax returns and refund claims, but only for its members.45
If a refund claim is excessive, the penalty under section 6676 falls on the person making the claim.6
Our position: Swanson Reed, which publishes this site, proposes that Congress prohibit contingent fees in federal research credit engagements under Section 41.

The argument in brief

Our position

A research credit adviser paid a percentage of the credit is paid more when the claim is larger. That is true whether or not the larger claim is better supported. The business carries the consequences if the claim does not hold. Treasury has tried to restrict this kind of fee for tax return and refund work, but its rule does not reach ordinary refund claims, one of the ways research credits are claimed, and professional codes bind only their members. 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 the size of the claim they produce. This is an argument about an incentive. It is not a claim that advisers who charge contingent fees act improperly.

The rest of this article sets out the facts behind that argument and then the argument itself, step by step. Each fact is cited to its source. Each step of the argument is in a labeled box.

Step 1: the fee rises with the claim

The federal research credit is calculated as a percentage of qualified research expenses above a base amount.7 A fee calculated as a percentage of the credit therefore rises when the credit rises.

Treasury's Circular 230 defines a contingent fee as any fee based, in whole or in part, on whether a position on a return or other filing avoids challenge or is sustained, and states that this includes a fee based on a percentage of the refund reported on a return or of the taxes saved, or that otherwise depends on the specific result attained.1 The AICPA Code defines a contingent fee in similar terms.4

Treasury has described the purpose of its rule. It said in 2024 that the rule was intended to restrict contingent fee arrangements based on their potential to encourage practitioners and their clients to take aggressive positions in the hope that they will not be audited.2 In the same notice, it said that charging a contingent fee for preparing an original return, amended return or claim for refund before an examination encourages evasion or abuse of federal tax law by incentivizing unduly aggressive positions that increase clients' reported tax benefits, and that a practitioner with a direct financial interest in a client's tax benefits may be incentivized to increase them.2

Our position

We agree with the way Treasury has described the incentive. A percentage fee does not make any adviser act improperly. It does mean that the adviser's income and the size of the claim move together, and that the adviser has more to gain from a larger claim than from a more cautious one. In a field where eligibility turns on judgment about which activities and costs qualify, we think that incentive should be removed rather than managed.

For a fuller explanation, see The incentive problem and How success fees work.

Step 2: the consequences fall on the business

If a refund claim is made for an excessive amount, the Internal Revenue Code imposes a penalty of 20 percent of the excessive amount on the person making the claim, unless the excess is due to reasonable cause.6

Paid preparers can also be penalized. A tax return preparer who prepares a return or refund claim with an understatement due to an unreasonable position, and who knew or reasonably should have known of it, owes the greater of $1,000 or 50 percent of the income derived from that return or claim.8 Circular 230 requires a practitioner to tell a client about penalties reasonably likely to apply to a position the practitioner advised on or a return the practitioner prepared.9

Our position

The tax, interest and any penalty on an overclaim are the business's liability. An adviser who is paid a percentage of the credit shares in the upside of a larger claim, but not in the tax that follows if it fails. Where an adviser promises to reimburse its fee if a claim is reduced, Circular 230 treats that promise as itself a contingent fee, and the tax still stays with the business.1 We think that imbalance is part of the case for reform. See Who bears the risk of an overclaim.

Step 3: existing rules do not close the gap

Circular 230 generally prohibits practitioners from charging contingent fees for matters before the IRS, which it defines to include preparing returns and claims for refund.1 Its authority rests on 31 U.S.C. 330, which allows Treasury to regulate the practice of representatives before the Department.10

In 2014 the courts limited that authority twice. The D.C. Circuit held that tax return preparers are not representatives who practice before the IRS (Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014)).2 A federal district court then held that the IRS lacked statutory authority to regulate the preparation and filing of ordinary refund claims, meaning claims filed after the original return but before an audit, and enjoined the IRS accordingly (Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014)).3

In December 2024 Treasury proposed to replace section 10.27 with a rule treating contingent fees for preparing original returns, amended returns and pre-examination refund claims as disreputable conduct.2 The eCFR text of section 10.27 current to 6 October 2026 is still the 2007 version.1 Any rule made under 31 U.S.C. 330 applies to representatives who practice before Treasury.10

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.4 It applies to AICPA members.5 The IRS states that preparers with a PTIN but no professional credential are authorized to prepare tax returns.11

Our position

The result is a patchwork. Whether a contingent fee is restricted for a research credit claim can depend on whether the claim is on an original return or a refund claim, whether an audit has begun, whether the adviser is a practitioner, and whether the adviser belongs to a professional body. We do not think the rules on how an adviser may be paid for a federal tax credit should turn on those distinctions. Treasury's authority has been tested in court and found limited. Congress can set a single rule for every adviser paid to prepare or support a Section 41 claim.

For the detail, see Professional standards and their limits and Amended and refund claims.

Step 4: better information requirements help, but do not address the fee

The IRS has raised its expectations of research credit claims. Since January 2022 it has required refund claims to identify the business components and research activities claimed and the qualified expenses.12 Section G of Form 6765, required for tax years beginning after 2025 subject to exceptions, reports information by business component.13 Treasury regulations require taxpayers to keep records sufficient to substantiate the credit.14

Form 6765 does not ask how the preparer of the claim was paid.13 For a factual account of the measures tax authorities in the United States and other countries have introduced, see What tax authorities changed.

Our position

Better documentation requirements make weak claims easier to identify after they are filed. They do not change the incentive that exists before a claim is filed. In our view the two approaches work together. Information requirements test the claim. A prohibition on contingent fees removes the financial reward for a larger figure.

What we propose

Swanson Reed's full position, with its evidence, is set out at Our position. The detailed proposals at Recommendations sit alongside the core position, a prohibition on contingent fees in federal research credit engagements. They cover:

disclosure of the fee basis when a claim is filed;
a prohibition on contingent fees for amended returns and refund claims, as the first step;
identification of the preparer and the technical reviewer on each claim;
shared responsibility for overclaims where a preparer knew or should have known a claim was excessive;
minimum professional standards for anyone preparing a research credit claim for a fee; and
publication of aggregate data on claims, reviews and adjustments.

Our position

These proposals are directed at Congress, Treasury and the IRS, and apply to the federal credit under Section 41 only. We take no position on state programs.

Objections

Our position

"Contingent fees let smaller businesses claim without paying up front." We understand why a business might prefer to pay only if a credit is obtained. A fixed fee can still be scheduled, for example payable when the return is filed, and can be capped. What a fixed fee removes is the link between the adviser's income and the size of the credit.

"Professional rules and IRS scrutiny are enough." The courts have limited what Treasury can do through its practice rules, professional codes bind only members, and IRS documentation requirements operate after a claim is prepared. We set out these limits in Step 3 and Step 4.

"This is self-interested." It is right to ask. Swanson Reed runs and pays for this initiative, is a fixed-fee R&D tax adviser, and has a direct commercial interest in the outcome: it does not charge success fees, and a ban would remove a pricing model it competes against. Today the initiative is one firm. We publish our sources so that anyone, including those who disagree, can test the argument. See Conflicts of interest.

Sources

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (b)(1), (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 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
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 2 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, paragraph .02. 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. 6676, Erroneous claim for refund or credit, 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-subchapB-partI-sec6676.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, 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-subtitleA-chap1-subchapA-partIV-subpartD-sec41.htm (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, subsection (a)(1), 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
Treasury Department, Circular No. 230, 31 CFR 10.34, Standards with respect to tax returns and documents, affidavits and other papers, paragraph (c)(1). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.34 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 31 U.S.C. 330, Practice before the Department, subsections (a) and (b), 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
Internal Revenue Service, Understanding tax return preparer credentials and qualifications, section on PTIN holders (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
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction and question 21 (page last reviewed or updated 1 October 2026). https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions (accessed 11 October 2026). Back
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), sections "Section G, Business Component Information" and "Requirements To Complete Section G". https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Treasury Department, 26 CFR 1.41-4, Qualified research for expenditures paid or incurred in taxable years ending on or after December 31, 2003, paragraph (d). https://www.ecfr.gov/current/title-26/section-1.41-4 (accessed 11 October 2026). Back

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

Key points

The argument in brief

Step 1: the fee rises with the claim

Step 2: the consequences fall on the business

Step 3: existing rules do not close the gap

Step 4: better information requirements help, but do not address the fee

What we propose

Objections

Sources

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