The rules on contingent fees in US tax practice (brief) | Research Credit Integrity Alliance

Key points

Circular 230 section 10.27 bars practitioners from charging contingent fees for matters before the IRS, including preparing returns and refund claims, with exceptions for examinations, interest and penalty claims, and litigation.1
In Loving v. IRS the D.C. Circuit held that Treasury's practice authority does not extend to tax return preparers, and in Ridgely v. Lew a district court enjoined enforcement of section 10.27 against refund claims prepared before an audit.23
The AICPA Code bars members in public practice from preparing an original or amended return or refund claim for a contingent fee, but binds only its members.45
Treasury's December 2024 proposal would treat these fees as disreputable conduct for practitioners, and had not been finalized when this brief was written.6

What Circular 230 says

Circular 230 is issued under 31 U.S.C. 330, which allows Treasury to regulate "the practice of representatives of persons before the Department of the Treasury".7 Its section 10.27 provides that, except as listed, a practitioner may not charge a contingent fee for services in connection with any matter before the IRS.1 A matter before the IRS includes preparing or filing returns or claims for refund or credit.1

A contingent fee includes a fee "based on a percentage of the refund reported on a return", a fee based on a percentage of taxes saved, and an arrangement to refund the fee if a position is challenged or not sustained.1 The exceptions cover IRS examinations of an original return, amended returns or refund claims filed within 120 days of a written notice of examination or challenge, interest and penalty claims, and judicial proceedings.1

When Treasury adopted the rule in 2007, it said restricting contingent fees for returns discourages "return positions that exploit the audit selection process".8 Section 10.27 applies to practitioners: attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents and registered tax return preparers.9

What the courts decided

In February 2014 the D.C. Circuit held that Treasury's authority under 31 U.S.C. 330 "cannot be stretched so broadly as to encompass authority to regulate tax-return preparers". It said that more stringent regulation might be wise policy, "But that is a decision for Congress and the President to make if they wish by enacting new legislation."2

In July 2014 the District Court for the District of Columbia applied that reasoning to contingent fees. It held that "the IRS lacks statutory authority to regulate the preparation and filing of Ordinary Refund Claims", meaning refund claims filed after the original return but before an audit, and permanently enjoined enforcement of section 10.27 in that respect.3

The eCFR text of section 10.27 is still the 2007 version.1

The 2024 proposal

On 26 December 2024 Treasury and the IRS proposed to remove section 10.27 and to define as disreputable conduct "Charging a contingent fee in connection with the preparation of an original or amended tax return or claim for refund or credit prepared prior to the examination of the tax return".6 They said that "A practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits."6 The proposal relies on Treasury's power to sanction practitioners, so it would not reach preparers who hold no credential.67 The Federal Register records 709 comments, and a search on 11 October 2026 found no final rule.6

What the AICPA Code says

A member in public practice shall not "Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client".4 Fees are not treated as contingent where the member can show a reasonable expectation that a government agency will give the matter substantive consideration, and the Code says that expectation is not reasonable where the member prepares the client's original return.10 The permitted examples include refund claims above the threshold for review by the Joint Committee on Taxation, which is $2,000,000, or $5,000,000 for a C corporation.1011 The Code binds AICPA members only.5

The gaps

Preparers with no credential. The IRS describes paid preparers with a preparer tax identification number but no credential, who are authorized to prepare returns. Neither rule reaches them.1225
Ordinary refund claims. A research credit missed on the original return is usually claimed before any audit, where section 10.27 cannot be enforced after Ridgely.3
Large refund claims by AICPA members. The AICPA exception allows contingent fees for claims above the Joint Committee threshold.1011
No disclosure. No rule requires a claim to state how its preparer was paid, and Form 6765 does not ask.13

The Code's preparer penalties apply to every paid preparer, but only after an understatement is found.14

The case for the present rules

Commenters told Treasury in 2007 that restrictions were overly broad, interfered with the relationship between practitioner and client, and prevented some small and middle market taxpayers from claiming refunds.8 Professional bodies already set rules for their members, and the penalty scheme deters abuse. Those are fair points. But each depends on coverage the rules lack, and access to advice can be provided by fixed, capped or staged fees that are not a share of the result.1

Our position

Congress should prohibit contingent fees, commonly called success fees, in federal research and development tax credit engagements under Section 41, so that the same rule applies to every adviser paid to prepare or support a claim and 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) to (d). 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, 11 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 (updated for all official releases through September 2026), ET 1.510.001 Contingent Fees Rule, paragraph .01. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (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. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (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, proposed section 10.51 and public comments panel. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 31 U.S.C. 330, Practice before the Department, subsections (a) and (c), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title31/html/USCODE-2024-title31-subtitleI-chap3-subchapII-sec330.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, Circular No. 230, 31 CFR 10.3, Who may practice, paragraphs (a) to (f). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.3 (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 1.510.010 Tax Matters, paragraphs .03 and .04. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6405, Reports of refunds and credits, 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-chap65-subchapB-sec6405.htm (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, Instructions for Form 6765 (Rev. December 2025), Sections E, F and G. https://www.irs.gov/instructions/i6765 (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