Auditor independence and contingent fees (brief) | Research Credit Integrity Alliance

Key points

An auditor of an SEC issuer is not independent if it provides any service to its audit client for a contingent fee, and the PCAOB removed the exception for tax matters decided by government agencies.12
The PCAOB said a contingent fee aligns the firm's economic interests with its client's, and the SEC's Chief Accountant said a possible government challenge to the client's tax savings heightens that mutuality of interest.2
The AICPA Code bars its members from preparing any client's original or amended return or refund claim for a contingent fee, and names a contingent fee on a tax refund claim as a self-interest threat.3
Treasury's own rule cannot be enforced against refund claims filed before examination, so a preparer outside the audit rules and the professional codes faces no federal fee rule.456

The audit rule

Rule 2-01 of the SEC's Regulation S-X asks whether a reasonable investor would conclude that an accountant is capable of objective and impartial judgment. It looks first to whether a relationship creates "a mutual or conflicting interest between the accountant and the audit client".1 It provides that an accountant is not independent if it provides any service to an audit client for a contingent fee, though its definition excludes fees in tax matters determined by the findings of governmental agencies.1

The PCAOB's Rule 3521, adopted in 2005, applies the same prohibition to registered firms and their affiliates, whether the fee is received directly or indirectly.2 The Board explained that when a firm provides a service to an audit client for a contingent fee, "the firm's economic interests become aligned with the interests of its audit client in a manner that is inconsistent with the firm's role as independent auditor".2 It did not adopt the SEC's tax matters exception, relying on the SEC Chief Accountant's view that the exception applies only where the fee is "taken out of the hands of the accounting firm and its audit client", and that a possible government challenge to the client's tax savings "heightens . . . the mutuality of interest".2

Auditors may still provide tax services to an issuer they audit, but only with advance approval of the audit committee, and the PCAOB requires the firm to describe "the fee structure for the engagement" in writing.27

The professional code

The AICPA Code bars members from charging contingent fees to clients for whom they perform audits, reviews and certain other attest services.3 It also bars members from preparing "an original or amended tax return or claim for a tax refund for a contingent fee for any client", unless they can reasonably expect a government agency to give the matter substantive consideration, which the Code says is not reasonable where the member prepares the original return.3 The Code's conceptual framework gives, as an example of a self-interest threat, "A firm enters into a contingent fee arrangement for a tax refund claim that is not a predetermined fee."3

State boards of accountancy set rules for licensed CPAs. California bars licensees from preparing an original return, or an amended return or refund claim, for a contingent fee for any client.8

The federal tax rule and its limits

Circular 230 bars practitioners from charging contingent fees for preparing returns and refund claims.4 In 2014 the D.C. Circuit held that Treasury's authority does not extend to regulating tax return preparers, and a district court then enjoined enforcement of the contingent fee rule for refund claims filed before an audit.56 A 2024 proposal to treat such fees as disreputable conduct would reach only practitioners and has not been finalized.9 The IRS describes paid preparers with a preparer tax identification number but no professional credentials, who are authorized to prepare returns.10 None of these rules reaches them.

Do the reasons carry over?

The audit rule rests on two reasons. The first, protecting investors who rely on an auditor's opinion, does not apply to a claim preparer. The second, the mutual interest a contingent fee creates in a result a government agency may later challenge, does. A research credit is calculated in the first instance on the preparer's judgments and is reviewed by the IRS only if the claim is selected. The IRS has said it examines such claims in a substantial number of cases, without saying how many.11

The case for the difference

A claim preparer is an advocate, not an independent checker. The IRS is an expert reviewer with examination powers and penalties, not an investor relying on an opinion. Contingent fees spare businesses an upfront cost and leave the adviser bearing the cost of work that finds nothing. When Treasury tightened its rule in 2007, commenters said restrictions would stop some small and middle market taxpayers from requesting refunds.12 These are real differences. Nothing in this brief suggests that advisers who charge contingent fees act improperly.

The answer is that the AICPA, which governs advocates as well as auditors, already treats a contingent fee on a refund claim as a self-interest threat.3 The possibility of IRS review is not enough even under the SEC's and AICPA's exceptions; the PCAOB removed the exception for auditors entirely.2 Low upfront cost can be provided by fixed, capped or deferred fees.

Our position

Congress should prohibit contingent fees, commonly called success 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 they produce. Swanson Reed, which publishes this brief, is a fixed-fee R&D tax adviser with a direct commercial interest: it does not charge success fees, and a ban would remove a pricing model it competes against.

References

Securities and Exchange Commission, 17 CFR 210.2-01, Qualifications of accountants, preliminary note and paragraphs (b), (c)(5) and (f)(10). https://www.ecfr.gov/current/title-17/section-210.2-01 (accessed 11 October 2026). Back
Public Company Accounting Oversight Board, Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees, PCAOB Release No. 2005-014 (26 July 2005), pages 18 to 21 (with footnote 41) and 24, and Rules 3521 and 3524. https://pcaobus.org/Rulemaking/Docket017/2005-07-26_Release_2005-014.pdf (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 1.000.010 paragraph .14, ET 1.510.001 paragraphs .01 to .03 and ET 1.510.010 paragraph .03. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (b) and (c). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.27 (accessed 11 October 2026). Back
US Court of Appeals for the District of Columbia Circuit, Loving v. Internal Revenue Service, No. 13-5061, decided 11 February 2014, slip opinion pages 2 to 3 and 17 to 18. https://media.cadc.uscourts.gov/opinions/docs/2014/02/13-5061-1479431.pdf (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
Office of the Law Revision Counsel, 15 U.S.C. 78j-1, Audit requirements, subsections (g) and (h), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title15/html/USCODE-2024-title15-chap2B-sec78j-1.htm (accessed 11 October 2026). Back
California Board of Accountancy, California Board of Accountancy Regulations (California Code of Regulations, Title 16, Division 1, current as of 1 July 2026), section 62. https://www.dca.ca.gov/cba/about/cba_regs.pdf (accessed 11 October 2026). Back
Treasury Department and Internal Revenue Service, Regulations Governing Practice Before the Internal Revenue Service, notice of proposed rulemaking, REG-116610-20, 89 FR 104915 (26 December 2024), Explanation of Provisions part B. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (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
Internal Revenue Service, IRS sets forth required information for a valid research credit claim for refund, News release IR-2021-203, 15 October 2021. https://www.irs.gov/newsroom/irs-sets-forth-required-information-for-a-valid-research-credit-claim-for-refund (accessed 11 October 2026). Back
Treasury Department and Internal Revenue Service, Regulations Governing Practice Before the Internal Revenue Service, final regulations, T.D. 9359, 72 FR 54540 (26 September 2007), preamble, "Contingent Fees", page 54541. https://www.federalregister.gov/documents/2007/09/26/E7-18918/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026). Back