For Congress | Research Credit Integrity Alliance

Key points

The federal research credit under Section 41 says nothing about how the advisers who prepare claims are paid.
Treasury's practice rules restrict contingent fees for practitioners, but a 2014 federal court decision held that the IRS could not apply that restriction to ordinary refund claims filed before an examination.1
Treasury proposed a new rule on contingent fees in December 2024. Swanson Reed asks Congress to settle the question for research credit engagements in statute.2

The issue on one page

The credit for increasing research activities in Section 41 of the Internal Revenue Code is generally 20 percent of the amount by which a taxpayer's qualified research expenses for the year exceed a base amount, plus amounts for basic research payments and energy research consortium payments.3 Section 41 defines the research that qualifies and the expenses that count. It contains no provision on the fees charged by the people who prepare a claim.3

A research credit can also be claimed after the original return has been filed, on an amended return or other claim for refund. The IRS treats these as refund claims that must meet specific information requirements at the time they are filed.4

A contingent fee is one that depends on the result. Treasury's practice rules describe it to include a fee based on a percentage of the refund reported on a return or a percentage of the taxes saved.5 For illustration only, with round numbers: on a research credit of $100,000, a fee of 20 percent of the credit would be $20,000, and on a credit of $200,000 the same fee would be $40,000.

Current federal rules

Section 41

Section 41 sets the amount of the credit (subsection (a)), defines qualified research expenses (subsection (b)) and qualified research (subsection (d)), and sets special rules (subsection (f)).3 Public Law 119-21, enacted on July 4, 2025, amended Section 41(d)(1)(A) so that qualified research refers to expenditures treated as domestic research or experimental expenditures under the new Section 174A.6 Neither text addresses adviser fees.36

Circular 230, section 10.27

Treasury Department Circular No. 230 (31 CFR Part 10) governs practice before the IRS. Section 10.27(b)(1) provides that a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS, except as set out in paragraphs (b)(2) to (b)(4).5 Those exceptions cover:

services connected with the IRS's examination of, or challenge to, an original return, or an amended return or refund claim filed within 120 days of the taxpayer receiving written notice of the examination or a written challenge;5
a refund claim filed solely in connection with the determination of statutory interest or penalties;5 and
any judicial proceeding arising under the Internal Revenue Code.5

"Practitioner" means the individuals described in section 10.3, which covers attorneys, certified public accountants, enrolled agents, enrolled actuaries and enrolled retirement plan agents, among others.5

The limits of section 10.27

On July 16, 2014, the United States District Court for the District of Columbia held in Ridgely v. Lew that the IRS lacked statutory authority to regulate the preparation and filing of "Ordinary Refund Claims", described by the court as refund claims filed after the original return but before the IRS has begun an audit of that return.1 The court relied on the D.C. Circuit's decision in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), and permanently enjoined enforcement of section 10.27 in that context.1

In December 2024, Treasury described the effect of the decision this way: the IRS cannot prohibit contingent fees for ordinary refund claims based on its authority to regulate practice before the IRS under 31 U.S.C. 330(a).2

The December 2024 proposed rule

On December 26, 2024, Treasury published proposed amendments to Circular 230 (REG-116610-20). They would remove section 10.27 and add a new provision in section 10.51, under which charging a contingent fee in connection with the preparation of an original or amended tax return, or a claim for refund or credit prepared before the examination of the return, would be disreputable conduct.2 Comments were due by February 24, 2025.2 Treasury's stated reasoning is that a practitioner with a direct financial interest in a client's tax benefits may be incentivized to increase those benefits.2 We have not found a final rule in the Federal Register.

A 2025 House provision

H.R. 1 in the 119th Congress, as passed by the House on May 22, 2025, contained section 112208, which provided that the Secretary of the Treasury may not regulate, prohibit or restrict the use of a contingent fee in connection with tax returns, claims for refund, or related documents prepared on behalf of a taxpayer.78 The Senate passed the bill with an amendment on July 1, 2025, and it became Public Law 119-21 on July 4, 2025.8 The enacted text does not contain that provision.6

The proposals

Our position

Congress should prohibit contingent fees in federal research credit engagements under Section 41, so that advisers are paid for the work performed rather than for the size of the claim. Written into the statute, the rule would not depend on how far Treasury's authority over practice before the IRS extends.

The full set of proposals is on the Recommendations page. By topic:

Disclosure: Fee disclosure on the claim, so that the fee basis is disclosed when a claim is filed.
Refund claims: Limits on contingent fees for refund claims, covering amended returns and refund claims.
Accountability: Preparer identification, naming the preparer and the technical reviewer on every claim.
Consequences: Shared responsibility for overclaims, where a preparer knew or should have known a claim was excessive.
Standards: Professional standards for claim preparers, for anyone preparing a claim for a fee.
Evidence: Data and reporting, publishing aggregate data on claims, reviews and adjustments.

Swanson Reed publishes this initiative and has a commercial interest in the outcome. It charges fixed fees, and a prohibition would remove a pricing model it competes against. See Conflicts of interest.

Contact

Members and staff can reach the initiative at hello@researchcreditintegrity.org. Our proposals, sources and methods are published on this site in full.

Sources

United States District Court for the District of Columbia, Ridgely v. Lew, Civil Action No. 1:12-cv-00565 (CRC), Memorandum Opinion (July 16, 2014), reported at 55 F. Supp. 3d 89 (D.D.C. 2014), pages 1, 8 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
Treasury Department, Regulations Governing Practice Before the Internal Revenue Service, notice of proposed rulemaking, REG-116610-20, 89 FR 104915 (December 26, 2024), Background B, Explanation of Provisions 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
Office of the Law Revision Counsel (published by the U.S. Government Publishing Office), United States Code, 2024 Edition, Title 26, Section 41, Credit for increasing research activities, subsections (a), (b), (d) and (f). 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
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction and FAQ 21. https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, Regulations Governing Practice before the Internal Revenue Service (Rev. 6-2014), 31 CFR sections 10.2(a)(5), 10.3 and 10.27. https://www.irs.gov/pub/irs-pdf/pcir230.pdf (accessed 11 October 2026). Back
Public Law 119-21, 139 Stat. 72, section 70302 (amending Section 41(d)(1)(A)), approved July 4, 2025. https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm (accessed 11 October 2026). Back
U.S. House of Representatives, H.R. 1, 119th Congress, Engrossed in House, section 112208. https://www.govinfo.gov/content/pkg/BILLS-119hr1eh/html/BILLS-119hr1eh.htm (accessed 11 October 2026). Back
Congress.gov, H.R. 1, 119th Congress, actions (passed House May 22, 2025; passed Senate with an amendment July 1, 2025; became Public Law No. 119-21 July 4, 2025). https://www.congress.gov/bill/119th-congress/house-bill/1/all-actions (accessed 11 October 2026). Back