Contingent fees in R&D tax credit claims (brief) | Research Credit Integrity Alliance

Key points

Treasury defines a contingent fee to include a fee based on a percentage of the refund reported on a return or of the taxes saved.1
The research credit depends on judgments made for each business component, and a fee calculated on the credit rises with each judgment that enlarges the claim.23
If a claim is reduced, the taxpayer repays the credit with interest and may owe a 20 percent penalty. No federal rule requires the fee to be refunded.451
Circular 230 and the AICPA Code restrict contingent fees for returns and refund claims, but courts held in 2014 that Treasury's practice authority does not reach return preparers or ordinary refund claims.1678
No official data shows how research credit claims are prepared or how their preparers are paid.9

How the fees work

The federal research credit under Section 41 is generally 20 percent of qualified research expenses above a base amount, or 14 percent under the alternative simplified credit.2 Whether research qualifies is decided separately for each business component, under a four-part test that includes a requirement that substantially all of the activities be a process of experimentation, which the regulations set at 80 percent.23

Circular 230 defines a contingent fee as any fee based in whole or in part on whether a position avoids challenge or is sustained, and says it includes a fee based on a percentage of the refund reported on a return or of the taxes saved.1 An arrangement to refund the fee if a position is challenged is also a contingent fee.1

As an illustration only: on a claimed credit of $100,000, a fee of 20 percent is $20,000. If the claim is prepared at $150,000, the fee is $30,000. The fee changes because the claim changes.

What the IRS has said

A 2008 IRS guide for examiners, which states that it is not an official pronouncement of IRS position, described research credit refund claims as usually based on studies by outside consultants and told examiners to obtain the engagement letter.10 It said: "Some fee agreements shift ultimate control over the resolution of the claim to the preparer."10

When Treasury adopted the current contingent fee rule in 2007, it said restricting contingent fees for returns discourages "return positions that exploit the audit selection process".11 In December 2024 Treasury and the IRS proposed to treat such fees as disreputable conduct, saying a practitioner with a financial interest in a client's tax benefits "may be incentivized to increase such tax benefits". The proposal has not been finalized.12

The IRS advises individual taxpayers to avoid preparers "who base their fees on a percentage of the refund".13

Who carries the risk

If a credit is reduced, the taxpayer repays it. Interest runs from the date the tax was due.14 A refund claim for an excessive amount carries a penalty of 20 percent of the excess on the person making the claim, unless there is reasonable cause.4 The preparer can face its own penalty if an understatement is due to an unreasonable position, measured partly by its income from the claim.5 Whether a contingent fee is refunded depends on the contract.

The rules and their limits

Circular 230 bars practitioners from charging contingent fees for matters before the IRS, including preparing returns and refund claims, except during examinations, for interest and penalty claims, and in litigation.1 The AICPA Code bars members in public practice from preparing an original or amended return or refund claim for a contingent fee.6

In 2014 the D.C. Circuit held that Treasury's authority does not extend to regulating tax return preparers, and said wider regulation is "a decision for Congress and the President".7 A district court then held that the IRS cannot apply its contingent fee rule to refund claims prepared before an audit.8 The AICPA Code binds only its members.6

The case for success fees

Businesses agree to contingent fees for real reasons. They cost nothing upfront, which helps small and cash-poor businesses claim at all. The adviser bears the cost of work that finds no credit. The fee moves with the benefit. When Treasury last revised its rule, commenters said restrictions would prevent some small and middle market taxpayers from requesting refunds.11 Nothing in this brief suggests that advisers who charge contingent fees act improperly.

The answer is about the incentive. Low upfront cost can be provided by fixed, capped or staged fees. The risk a contingent fee shares is that no credit is found; the risk that the credit fails on examination stays with the taxpayer.414 A fee tied to the amount claimed is not tied to the amount that survives, which is the amount the business keeps.

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

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
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, subsections (a), (c)(4)(A), (d)(1) and (d)(2), 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
Treasury Department, 26 CFR 1.41-4, paragraph (a)(6). https://www.ecfr.gov/current/title-26/section-1.41-4 (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. 6694, Understatement of taxpayer's liability by tax return preparer, 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-sec6694.htm (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 0.200.020 paragraph .02 and ET 1.510.001 paragraph .01. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (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
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), Sections E, F and G. https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Internal Revenue Service, Large and Mid Size Business Division, Research Credit Claims Audit Techniques Guide (RCCATG): Credit for Increasing Research Activities Section 41, LMSB-04-0508-030 (May 2008), introductory note and Chapter II. https://www.irs.gov/businesses/research-credit-claims-audit-techniques-guide-rccatg-credit-for-increasing-research-activities-section-41 (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", pages 54541 to 54542. https://www.federalregister.gov/documents/2007/09/26/E7-18918/regulations-governing-practice-before-the-internal-revenue-service (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), 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, Topic no. 254, How to choose a tax return preparer (page last reviewed or updated 7 October 2026). https://www.irs.gov/taxtopics/tc254 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6601, Interest on underpayment, nonpayment, or extensions of time for payment, of tax, 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-chap67-subchapA-sec6601.htm (accessed 11 October 2026). Back