Alternative fee models (brief) | Research Credit Integrity Alliance

Key points

Treasury's Circular 230 defines a contingent fee as any fee based in whole or in part on the result, including a percentage of a refund and any promise to return the fee if a position fails.1
A cap on a percentage fee, a fixed element added to it, or a money back promise attached to a fixed fee does not take the arrangement outside that definition.1
Fixed fees, hourly rates and fee ranges are recognized in Treasury's rules on fee information.2
The IRS information requirements for research credit refund claims describe the work a fixed or hourly fee has to price.3

The question

Debate about how research credit advisers are paid is often framed as a choice between a success fee and nothing. There are other models. This brief summarizes the companion white paper, which tests each one against the federal definition of a contingent fee and sets out what a practice must change to move away from success fees. It does not report how common any model is: we found no official source that publishes that information.

The definition that decides

Circular 230 generally prohibits a practitioner from charging a contingent fee for services in connection with any matter before the IRS, which includes preparing returns and claims for refund or credit.1 A contingent fee is "any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained". It includes a fee based on a percentage of the refund or of the taxes saved, and any arrangement to reimburse the client's fee if a position is challenged or not sustained.1

In 2014 a federal court held that the IRS could not enforce this rule against the preparation of refund claims filed before an audit.4 The definition itself is unchanged, and it remains the clearest available test of whether a fee depends on the result.1

The AICPA Code takes a similar approach. It prohibits members from preparing an original or amended return or a claim for refund for a contingent fee for any client, and notes that "A member's fees may vary depending, for example, on the complexity of services rendered."5

The models in brief

Model	Contingent under the Circular 230 definition?
Fixed fee	No, unless combined with a refund promise
Hourly fee, with or without a maximum	No
Percentage of the credit	Yes
Percentage with a cap	Yes: still a percentage
Fixed fee plus a percentage	Yes: based in part on the result
Fixed fee refunded if the IRS challenges	Yes: a reimbursement arrangement

The table classifies structures in general terms and is not advice on any engagement letter.

As illustrative arithmetic only: a fee of 20 percent of the credit capped at $50,000 is identical to an uncapped 20 percent fee on any credit up to $250,000. On a credit of $100,000 both produce a fee of $20,000.

Examination support is a separate question. Circular 230 permits contingent fees for services in connection with an IRS examination of an original return, and of an amended return or claim filed within 120 days of written notice of the examination.1 A practice can therefore price claim preparation on a fixed or hourly basis and agree separately how examination work will be charged.

What a fixed fee has to price

A success fee needs little scoping. A fixed or hourly fee needs a lot, and the IRS has largely defined it. A research credit refund claim must identify the business components, the research activities for each, and the total qualified wage, supply and contract research expenses.3 The names of the people who did the work and the information they sought may be requested on examination.3 Treasury regulations require records "in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit."6 Each of those is a unit of work that can be priced in advance.

Moving a practice away from success fees

The white paper sets out five steps in general terms:

Classify existing arrangements against the definition, looking for refund promises and capped percentages.
Decide how to treat engagements already under way. Regulators have allowed conversion periods before. The SEC noted that the PCAOB's auditor rule would not apply to contingent fee arrangements "converted to fixed fee arrangements, or otherwise unwound before 60 days after the date of this order."7
Build a pricing method from the inputs the IRS asks about: components, people, records and years.
Separate claim work from examination work so clients can compare like with like.
Explain the change to clients. Penalties for an overclaim fall on the taxpayer or the person making the claim, not on the adviser, whatever the fee model.89

Our recommendation

Our position

Swanson Reed, the publisher of this site, is a fixed-fee R&D tax adviser with a direct commercial interest in this question. Our position is that Congress should prohibit contingent fees in federal research and development tax credit engagements under Section 41, so that advisers are paid for the work they perform rather than for the size of the claim. Fixed and hourly fees are already recognized in Treasury's rules and would remain available.

References

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (b)(1) to (b)(4), (c)(1) and (c)(2). 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 10.30, Solicitation, paragraph (b)(1). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.30 (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
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 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, AICPA Code of Professional Conduct (effective December 15, 2014, updated through September 2026), ET 1.510.001, Contingent Fees Rule, paragraphs .01 to .04. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (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
Securities and Exchange Commission, Public Company Accounting Oversight Board; Order Approving Proposed Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees, Release No. 34-53677 (19 April 2006), pages 3 and 4. https://www.sec.gov/files/rules/pcaob/2006/34-53677.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6662, Imposition of accuracy-related penalty on underpayments, 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-chap68-subchapA-partII-sec6662.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6676, Erroneous claim for refund or credit, 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-chap68-subchapB-partI-sec6676.htm (accessed 11 October 2026). Back