The economics of claim preparation (brief) | Research Credit Integrity Alliance

Key points

A research credit claim is a set of judgments made for each business component, and each judgment can change the amount claimed.12
Under a fixed or hourly fee the adviser's income does not depend on which way a judgment falls; under a fee calculated on the credit it does.3
If a claim is reduced, the taxpayer repays the credit with interest and may owe a 20 percent penalty; no federal rule requires a contingent fee to be returned.453
Tax authorities in the United States and the United Kingdom have each described the incentive a result based fee creates.67
No official data shows how US research credit claims are paid for or whether outcomes differ by fee arrangement.89

The product and its price

The federal research credit under Section 41 is generally 20 percent of qualified research expenses above a base amount, and the test of qualified research is applied separately to each business component.1 The regulations treat the substantially all requirement as met only if 80 percent or more of the research activities are a process of experimentation, and require records that substantiate the claim.2 An adviser therefore delivers a set of judgments, the number they produce, and the records that support them.

The adviser can be paid a fixed fee, an hourly fee, or a contingent fee. Treasury defines a contingent fee to include any fee based in whole or in part on the result, including a percentage of the refund or of the taxes saved.3 A cap or a fixed element does not take a percentage fee outside that definition.3

Where the fee meets the work

Judgments. A fee calculated on the credit pays more each time a close question is resolved toward a larger claim. As an illustration only: at 20 percent, a claim prepared at $100,000 produces a fee of $20,000, and the same claim prepared at $150,000 produces $30,000. A fixed fee is the same at either figure.
Records. Documentation costs effort and does not increase the credit, so under a fee calculated on the credit it is paid for out of a fee set by the size of the claim.
Timing. Treasury said in 2007 that restricting contingent fees discourages "return positions that exploit the audit selection process", with particular concern for refund claims filed late in the examination process.6
Control. A 2008 IRS guide for examiners, which states that it is not an official statement of IRS position, said some fee agreements "shift ultimate control over the resolution of the claim to the preparer".10

None of this means that advisers act on the incentive. Many advisers paid on results may resolve close questions carefully.

Who carries the risk

A contingent fee shares the risk that no credit is found. The risk that a credit fails on examination stays with the taxpayer, who repays it with interest and may owe a 20 percent penalty on an excessive refund claim.54 The preparer's own penalty applies only to positions it knew or should have known lacked support, and is measured partly by its income from the claim.11

What officials have said

In 2006 the Commissioner of Internal Revenue told the Senate Finance Committee that research credit refund claims, "often marketed to them on a contingency fee basis", were "frequently based on unsupportable amounts".12 In 2024 Treasury and the IRS wrote that a practitioner with a financial interest in a client's tax benefits "may be incentivized to increase such tax benefits"; that proposal has not been finalized.7 HMRC said in 2024 that paying credits only to the claimant would reduce "the financial incentive for agents to overstate claims".13

The case for success fees

The arguments are real. A business short of cash can claim without paying upfront. It pays nothing if no credit is found. An adviser willing to be paid on results signals confidence, and has a reason to find every credit. Commenters told Treasury in 2007 that restrictions would prevent some small and middle market taxpayers from requesting refunds.6

The answer is that low upfront cost can be met by fixed, capped or staged fees; the risk shared is the risk of finding nothing, not the risk of a failed claim; and the adviser's confidence is that a credit will be paid, not that it will survive examination.

The data gap

Form 6765 does not ask how a claim's preparer was paid.8 The IRS's published corporation research credit tables run only to tax year 2014.9 Canada collects each preparer's billing arrangement on its SR&ED form, but no analysis of that data was found.14 The argument therefore rests on the structure of the fee and the allocation of risk in the law, not on measured outcomes.

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

Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, subsections (a)(1) and (d)(2)(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-subtitleA-chap1-subchapA-partIV-subpartD-sec41.htm (accessed 11 October 2026). Back
Treasury Department, 26 CFR 1.41-4, paragraphs (a)(6) and (d). https://www.ecfr.gov/current/title-26/section-1.41-4 (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
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
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
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, 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; Federal Register docket search on that date showed no final rule). Back
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), read in full. https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Internal Revenue Service, SOI Tax Stats: Corporation research credit, table list. https://www.irs.gov/statistics/soi-tax-stats-corporation-research-credit (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
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
Internal Revenue Service, IRS Commissioner Testifies before Senate Committee on Finance on Compliance Concerns Relative to Large and Mid-Size Businesses, IR-2006-94 (13 June 2006), written testimony, section "Research & Experimentation (R&E) Credit Claims". https://www.irs.gov/pub/irs-news/ir-06-094.pdf (accessed 11 October 2026). Back
HM Revenue and Customs, Approach to Research and Development tax reliefs 2023 to 2024 (published 30 October 2024), section 2.1. https://www.gov.uk/government/publications/hmrcs-approach-to-research-and-development-tax-reliefs-2023-to-2024/approach-to-research-and-development-tax-reliefs-2023-to-2024 (accessed 11 October 2026). Back
Canada Revenue Agency, T4088, Guide to Form T661 (T4088(E) Rev. 20), Part 9, Claim preparer information, lines 950 to 965. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088/guide-form-t661-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html (accessed 11 October 2026). Back