Our position | Research Credit Integrity Alliance

The position

Our position

We ask Congress to prohibit contingent fees, commonly called success fees, in federal research and development tax credit engagements under Section 41 of the Internal Revenue Code. Advisers should be paid for the work they perform, not for the size of the claim they produce.

The rest of this page explains who is making this argument, the reasoning behind it, and its limits. Facts are cited to their sources. Swanson Reed's opinions are always labeled as its position: recommendations and arguments appear in boxes labeled "Our position" or sections headed as Swanson Reed's view, and every page in the Policy section carries a note that its proposals are Swanson Reed's position.

Who is behind this position

This initiative is run and paid for by Swanson Reed, a fixed-fee R&D tax adviser. Swanson Reed is a for-profit firm 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.

We state this first because readers are entitled to weigh an argument knowing who is making it and what they stand to gain. Today the initiative is one firm. It has no members, partners or coalition. Swanson Reed does not coordinate pricing with other firms and will not do so. The full statement is on our conflicts of interest page.

The credit in brief

The federal research credit is set out in Section 41 of the Internal Revenue Code. Under the regular method, the credit includes 20 percent of the amount by which a business's qualified research expenses for the year exceed a base amount.1 A business may instead elect the alternative simplified credit, equal to 14 percent of qualified research expenses above 50 percent of its average qualified research expenses for the three preceding years.2 Businesses claim the credit on IRS Form 6765, Credit for Increasing Research Activities.3

The size of a claim therefore depends on judgments about which activities count as qualified research and which costs count as qualified research expenses.

The arithmetic of a percentage fee

Treasury's rules for those who practice before the IRS define a contingent fee as any fee based, in whole or in part, on whether a position taken on a return avoids challenge or is sustained. The definition expressly includes a fee based on a percentage of the refund reported on a return or a percentage of the taxes saved.4

Under a fee calculated as a percentage of the credit, the fee rises with the claim. As an illustration only, with round numbers: on a credit of $100,000, a 20 percent fee would be $20,000. If the same work were presented as a credit of $150,000, the fee would be $30,000. The additional $10,000 is earned by the larger number, whether or not the larger number is better supported.

This is a point about incentives, not about people. It does not assume that any adviser who charges a contingent fee prepares an inaccurate claim. The point is that the fee structure pays more for a larger claim and nothing extra for a better supported one.

Who bears the consequences of a claim that does not hold

When a research credit is reduced or disallowed, the federal consequences fall first on the business that made the claim.

The credit itself. The business loses the amount of credit that is disallowed.
Interest. Where tax is not paid by the date it was due, interest runs at the underpayment rate.5
Penalties on the business. A claim for refund or credit of income tax made for an excessive amount carries a penalty of 20 percent of the excessive amount, unless the business shows reasonable cause.6 An underpayment attributable to negligence or disregard of rules carries an accuracy-related penalty of 20 percent of that portion of the underpayment.7

Preparers face penalties too, but they are calculated differently. A tax return preparer who prepares a claim with an understatement due to an unreasonable position that the preparer knew or reasonably should have known about is liable for the greater of $1,000 or 50 percent of the income the preparer derived from that return or claim.8 For willful or reckless conduct, the penalty is the greater of $5,000 or 75 percent of that income.8

As an illustration only: if a business's claim is overstated by $100,000 and the 20 percent penalty applies, the business's penalty alone is $20,000, before interest and the cost of responding to an examination. The preparer penalty for an unreasonable position is measured by the preparer's income from that claim, not by the size of the overstatement.

Our position

Some engagement letters include audit support, but audit support does not move the tax, interest or penalties from the business to the adviser. A fee that grows with the claim, paid by a business that carries most of the cost if the claim fails, separates the reward for a larger claim from the risk of an unsupported one. We think that separation is the core problem, and that paying advisers for the work performed is the simplest way to remove it.

What the existing rules already do

Treasury's Circular 230 already restricts contingent fees across much of federal tax practice. Practitioners may not charge a contingent fee for services in connection with any matter before the IRS, except in limited cases such as services connected with an IRS examination of a return, certain claims filed within 120 days of a written notice of examination, claims solely about statutory interest or penalties, and judicial proceedings.9

Two federal court decisions in 2014 limit how far those rules reach:

In 2014 the US Court of Appeals for the District of Columbia Circuit held that the IRS's authority under 31 U.S.C. § 330 to "regulate the practice of representatives of persons before the Department of the Treasury" does not extend to regulating tax return preparers.10
Later in 2014 the US District Court for the District of Columbia held that the IRS lacked statutory authority to restrict contingent fees for preparing and filing "Ordinary Refund Claims", meaning refund claims filed after the original return but before the IRS has begun an audit, and permanently enjoined the IRS from enforcing the restriction for those claims.11

The text of the contingent fee rule remains in the Code of Federal Regulations,9 but the IRS cannot enforce it against the preparation of ordinary refund claims, and its authority to set conduct rules for preparers who are not practitioners is limited.

Our position

Because the limits come from the statute, the remedy needs Congress. A statutory prohibition on contingent fees in Section 41 engagements would apply to everyone who prepares a research credit claim for a fee, and to original returns, amended returns and refund claims alike.

Scope

The proposals

The six proposals set out practical steps consistent with this position, each addressed to Congress, Treasury or the IRS:

Sources

U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 41, Credit for increasing research activities, § 41(a)(1). 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
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 41, Credit for increasing research activities, § 41(c)(4)(A). 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, Form 6765, Credit for Increasing Research Activities (Rev. December 2024), page 1. https://www.irs.gov/pub/irs-pdf/f6765.pdf (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR § 10.27, Fees, § 10.27(c)(1). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/section-10.27 (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6601, Interest on underpayment, nonpayment, or extensions of time for payment, of tax, § 6601(a). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap67-subchapA-sec6601.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6676, Erroneous claim for refund or credit, § 6676(a) and (b). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6676.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6662, Imposition of accuracy-related penalty on underpayments, § 6662(a) and (b)(1). https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapA-partII-sec6662.htm (accessed 11 October 2026). Back
U.S. Government Publishing Office, United States Code, 2024 Edition, 26 U.S.C. § 6694, Understatement of taxpayer's liability by tax return preparer, § 6694(a)(1) and (b)(1). 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 § 10.27, Fees, § 10.27(b)(1) to (4). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/section-10.27 (accessed 11 October 2026). Back
United States Court of Appeals for the District of Columbia Circuit, Loving v. Internal Revenue Service, No. 13-5061, 742 F.3d 1013 (D.C. Cir. 2014), slip opinion pages 2 to 3 and 18. https://media.cadc.uscourts.gov/opinions/docs/2014/02/13-5061-1479431.pdf (accessed 11 October 2026). Back
United States District Court for the District of Columbia, Ridgely v. Lew, Civil Action No. 1:12-cv-00565, 55 F. Supp. 3d 89 (D.D.C. 2014), memorandum opinion pages 1 and 14 to 15. https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv0565-48 (accessed 11 October 2026). Back