Alternative fee models

1Summary

Most of the debate about how research credit advisers are paid is framed as a choice between a success fee and nothing. In practice there are several other ways to price the work: a fixed fee, an hourly rate, a capped fee and a hybrid of these. This paper describes each model, tests it against the federal definition of a contingent fee, and sets out what a practice would need to change to move from success fees to one of the others.

The test matters because Treasury's rule is broad. Circular 230 defines a contingent fee as any fee based, in whole or in part, on whether a position on a return avoids challenge or is sustained, and it expressly includes a percentage of a refund and any arrangement to return the fee if a position fails.1 A capped percentage fee is still a percentage fee. A fixed fee with a money back promise is, under that definition, a contingent fee.

The paper does not report how common any model is, because no official source publishes that information.2 It draws on Treasury's rules, the AICPA Code of Professional Conduct, the IRS requirements for research credit claims and the statute itself. Swanson Reed, which publishes this site, charges fixed fees and has a commercial interest in this subject. Its position is stated once, in a labeled box, and is kept separate from the analysis.

2Why the fee model matters for a research credit claim

2.1The credit is a number that someone has to calculate

The federal research credit is, for the regular method, 20 percent of the excess of qualified research expenses for the year over a base amount.3 Qualified research has to meet the statutory tests, which are applied separately to each business component of the taxpayer.4 The size of the credit therefore depends on judgments: which projects are business components, which activities within them qualify, and which wages, supplies and contract costs are qualified research expenses. Each of those judgments moves the final figure.

A fee model decides how the adviser's income relates to those judgments. Under a percentage fee the adviser's income rises with every judgment resolved in favor of a larger claim. Under a fixed or hourly fee it does not. The point is about incentives, not about the conduct of any adviser: many advisers paid by percentage take careful positions, and a fixed fee does not guarantee good work. The question for policy is which structure lines up the adviser's interest with an accurate claim.

2.2Treasury's stated reasons

When Treasury and the IRS adopted the current contingent fee rule in 2007, they said they continued to believe that a rule restricting contingent fees for preparing tax returns "supports voluntary compliance with the Federal tax laws by discouraging return positions that exploit the audit selection process".5 In their 2024 proposal to revise Circular 230 they described the existing rule as "intended to restrict contingent fee arrangements based on their potential to encourage practitioners and their clients to take aggressive positions with the hope that they will not be audited".6 The same proposal 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

Those are statements of Treasury's reasoning, not findings about any adviser. They explain why the definition of a contingent fee, rather than the label an engagement letter uses, is the test that matters.

3How the federal rules define a contingent fee

3.1Circular 230

Circular 230, the Treasury regulations that govern practice before the IRS, says that a practitioner may not charge an unconscionable fee in connection with any matter before the IRS, and generally may not charge a contingent fee for services rendered in connection with any matter before the IRS.1 A matter before the IRS includes "preparing or filing or assisting in preparing or filing returns or claims for refund or credit".1

The definition has three parts:1

The general test. 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 either by the Internal Revenue Service or in litigation."
Named examples. It "includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained."
Refund promises. It "also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client's fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect."

The rule allows contingent fees in three settings: services in connection with the IRS's examination of, or challenge to, an original return, or an amended return or claim filed within 120 days of the taxpayer receiving written notice of the examination or challenge; claims filed solely in connection with the determination of statutory interest or penalties; and judicial proceedings arising under the Internal Revenue Code.1

In 2014 a federal district court held that the IRS lacked statutory authority to regulate the preparation and filing of refund claims filed before an audit begins, and enjoined enforcement of section 10.27 in that respect.7 The published text of section 10.27 is unchanged.1 That decision limits how far the rule reaches. It does not change what the definition describes, which is why the definition remains a useful test of whether a fee model is contingent.

3.2The AICPA Code

The AICPA Code of Professional Conduct, which applies to members of the AICPA, prohibits a member in public practice from preparing "an original or amended tax return or claim for a tax refund for a contingent fee for any client".8 Its definition is close to Treasury's: a contingent fee is one established under an arrangement "in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service."8 The Code adds that "A member's fees may vary depending, for example, on the complexity of services rendered."8 That sentence is the AICPA's recognition that a fee can reflect how hard the work is without depending on the result.

4The models compared

4.1Fixed fees

A fixed fee is agreed before the work is done and does not change with the size of the credit. Circular 230 expressly allows a practitioner to publish "Fixed fees for specific routine services", along with hourly rates, a range of fees for particular services and the fee for an initial consultation.9 A practitioner who publishes a fee schedule may charge no more than the published rates for at least 30 calendar days after the schedule was last published.9

The strength of a fixed fee is that the adviser's income is the same whether the claim is large or small. The weakness is pricing risk. A fixed fee has to be set before the adviser knows how many business components there are, how good the records are and how much interviewing the work will take. If the fee is set too low the adviser may be tempted to do less work; if it is set too high the client pays for work that was not needed. Both risks are managed by scoping, which is discussed below.

4.2Hourly fees

An hourly fee charges for the time spent at agreed rates. Circular 230 lists hourly rates among the fee information a practitioner may publish.9 An hourly fee has no link to the size of the credit. Its weakness is the mirror image of a fixed fee: the client bears the risk that the work takes longer than expected. Engagement letters often deal with that by estimating the hours for each stage and requiring the adviser to seek approval before exceeding the estimate.

4.3Capped fees

A capped fee can mean two quite different things, and the difference is decisive.

A cap on time based or fixed charges. An hourly engagement with a maximum total is still an hourly engagement. Nothing in it depends on the result.
A cap on a percentage. A fee of a percentage of the credit, subject to a maximum, still rises with the credit until the cap is reached. Under Circular 230 it is a fee "based on a percentage of the refund reported on a return" and so a contingent fee, whatever the cap.1

As illustrative arithmetic only: a fee of 20 percent of the credit capped at $50,000 behaves exactly like an uncapped 20 percent fee on any credit up to $250,000. On a credit of $100,000 the fee is $20,000; on a credit of $200,000 it is $40,000. The cap changes the fee only on very large claims.

4.4Hybrid fees

A hybrid fee combines a fixed element with a contingent one, for example a fixed fee for the work plus a percentage of the credit allowed. The Circular 230 definition answers the classification question directly: a fee "based, in whole or in part" on the result is a contingent fee.1 The fixed element reduces the share of the adviser's income that depends on the result, but it does not remove the dependence.

A second kind of hybrid is a fixed fee with a promise to refund some or all of it if the IRS challenges the claim. The definition treats that too as a contingent fee, because it includes any arrangement under which the practitioner will reimburse the client's fee if a position is challenged or not sustained.1 This matters in practice, because a money back promise can look like a client protection while having the same economic effect as a fee paid only on success.

4.5Fees for examination support

If the IRS examines a claim, the client will usually need help to respond. Circular 230 allows a contingent fee for services in connection with the IRS's examination of, or challenge to, an original return, and for an amended return or claim filed within 120 days of written notice of the examination or challenge.1 The AICPA Code gives "Representing a client in connection with a revenue agent's examination of the client's federal or state income tax return" as an example of a permitted contingent fee.10 An examination support arrangement is therefore a separate question from the fee for preparing the claim. A practice can charge a fixed or hourly fee for the claim and agree in advance how examination work will be priced.

4.6Figure 1: fee models tested against the Circular 230 definition

Model	What the fee depends on	Contingent under the Circular 230 definition?
Fixed fee	The agreed scope of work	No, unless combined with a refund promise
Hourly fee	Time spent at agreed rates	No
Hourly fee with a maximum	Time spent, up to a ceiling	No
Percentage of the credit	The size of the credit	Yes: a percentage of the refund or taxes saved
Percentage with a cap	The size of the credit, up to a ceiling	Yes: still based on a percentage
Fixed fee plus a percentage	Partly the scope, partly the result	Yes: based "in part" on the result
Fixed fee with a refund if challenged	The scope, unless the IRS challenges	Yes: a reimbursement arrangement

Source: Treasury Department, Circular 230, 31 CFR 10.27(c)(1).1 The table classifies fee structures in general terms. It is not advice on any particular engagement letter.

5What a fixed or hourly engagement has to define

A success fee does not need a detailed scope, because the adviser is paid on the outcome. A fixed or hourly fee does. The work it has to price is set largely by the law and by the IRS's own information requirements.

5.1The work the IRS expects to see

For refund claims, the IRS now requires specific information with every research credit claim. A claim must identify the business components to which it relates, the research activities performed for each, and the total qualified wage, supply and contract research expenses for the year.11 Since 18 June 2024 the IRS has waived the requirement to provide, at the time of filing, the names of the individuals who performed each activity and the information each sought to discover, but those items may still be requested if the claim is examined.11 A response that only repeats the legal definitions in the Code or regulations is treated as insufficient.12

For original returns, Form 6765 now includes Section G, Business Component Information. The instructions say Section G is optional for all filers for tax years beginning before 2026 and required for tax years beginning after 2025, subject to exceptions for qualified small businesses claiming the payroll tax election and for certain smaller filers on original returns.13

Every one of those items is a unit of work: identifying components, interviewing the people who ran the projects, mapping wages to activities and checking contract terms. A fixed fee can be built from them. An hourly estimate can be built from them. In both cases the client can see what it is paying for.

5.2Records

Treasury regulations require a taxpayer claiming the credit to "retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit."14 An engagement letter can say who gathers those records, in what form, and whether the adviser's work papers will be handed over at the end. Those are scope questions that a fixed fee forces the parties to answer.

5.3Costs

Circular 230 says that any statement of fee information concerning matters in which costs may be incurred "must include a statement disclosing whether clients will be responsible for such costs."9 The same discipline is useful in a private engagement letter: travel, specialist engineering input and the cost of responding to IRS letters can all be named, priced or excluded.

5.4Examination

The IRS says it will try to make determinations on research credit refund claims within 6 months of receipt, and that during a transition period running through 10 January 2027 a taxpayer whose claim is found deficient receives a letter giving 45 days to perfect it.11 An engagement letter can say whether answering those letters is within the fixed fee, priced separately at hourly rates, or excluded. Leaving it unstated is the gap most likely to cause a dispute.

6Moving a practice from success fees

This section describes, in general terms, the decisions a practice faces when it moves from percentage fees to fixed or hourly fees. It is not a description of any firm's practice and does not report how many firms have made the change; no official source records that.2

6.1Step one: classify every current arrangement

The first task is to test each existing engagement letter against the definition in Figure 1. Arrangements described as fixed may contain refund promises. Arrangements described as capped may still be percentages. A practice whose staff are AICPA members also has to check the AICPA rule, which prohibits a contingent fee for preparing an original or amended return or claim for refund for any client.8

6.2Step two: decide how to treat engagements already under way

Engagements signed before the change raise a practical question: whether to finish them on the old terms or convert them. There is a regulatory precedent for conversion. When the Securities and Exchange Commission approved the Public Company Accounting Oversight Board's rule treating audit firms as not independent if they have contingent fee arrangements with audit clients, it noted that the rule "would not be applied to contingent fee arrangements that were paid in their entirety, converted to fixed fee arrangements, or otherwise unwound before 60 days after the date of this order."15 Treasury did something similar in 2007, applying its revised rule only to fee arrangements entered into after March 26, 2008, "To eliminate any adverse impact that the adoption of these final regulations could have on pending or imminent transactions".5 Both show that regulators have treated a period for converting existing arrangements as a normal part of moving away from contingent fees.

6.3Step three: build a pricing method

A fixed fee needs a method. The obvious inputs are the ones the IRS asks about: the number of business components, the number of people who must be interviewed, the state of the payroll and project records, and whether the claim covers one year or several. A practice can publish ranges for typical engagements, as Circular 230 allows.9 The AICPA Code's statement that fees may vary with the complexity of the services describes the principle: the fee follows the work, not the result.8

6.4Step four: separate claim work from examination work

Because Circular 230 and the AICPA Code both treat examination representation differently from claim preparation, a practice can price the two separately.110 Doing so lets the client compare the cost of preparing a claim across advisers without the comparison being distorted by different promises about audit defense.

6.5Step five: explain the change to clients

Clients used to paying only on success will ask why they should now pay whatever the outcome. The honest answer is that under a fixed fee the adviser has no reason to make the claim larger than the records support, and the client keeps the whole of whatever credit is allowed. The client also bears the consequences of any overclaim regardless of how the adviser was paid: the accuracy related penalty under section 6662 and the excessive refund claim penalty under section 6676 are imposed on the taxpayer or the person making the claim.1617

7Objections to fixed and hourly fees

Three objections are commonly made to moving away from success fees. They are set out here in brief; a fuller treatment is in the companion paper The case for success fees, examined.

Cash flow. A business may not want to pay a fee before it has received any benefit. A fixed fee can be split into stages and timed to the filing of the return. Section 41(h) also lets a qualified small business elect to apply part of the credit against payroll taxes, which can bring the benefit forward for businesses that have no income tax to offset.18
Risk sharing. A success fee is said to share the risk of failure between client and adviser. It shares the risk of a smaller credit. It does not share the penalties or interest that follow a disallowed credit, because those fall on the taxpayer.1617
Uncertain scope. A business may not know at the outset how much work its claim needs. A short, separately priced scoping stage can answer that before the main fee is agreed.

8What this paper does not show

This paper describes rules and structures. It does not show that any fee model produces better or worse claims, because no official source publishes claim outcomes by fee arrangement.2 It does not describe any firm's prices or practices, and its arithmetic is illustrative only.

9Our position

Our position

Swanson Reed, the publisher of this site, is a fixed-fee R&D tax adviser. It has a direct commercial interest in this question: it does not charge success fees, and a ban would remove a pricing model it competes against. 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 they produce. Fixed and hourly fees, and the other structures that do not depend on the result, are already recognized in Treasury's rules and would remain available.

References

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (a), (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
Internal Revenue Service, Statistics of Income, SOI Tax Stats: Corporation research credit (page last reviewed or updated 9 November 2025), table list; and Internal Revenue Service, Form 6765, Credit for Increasing Research Activities, and Instructions for Form 6765 (Rev. December 2025), which do not ask how a preparer was paid. https://www.irs.gov/statistics/soi-tax-stats-corporation-research-credit and https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, subsection (a)(1), 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
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, subsections (d)(1) and (d)(2), United States Code 2024 edition published by the Government Publishing Office; subsection (d)(1)(A) as amended by Public Law 119-21, section 70302(b)(2)(A). 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 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, page 104918. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (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, Circular No. 230, 31 CFR 10.30, Solicitation, paragraph (b). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.30 (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (effective December 15, 2014, updated through September 2026), ET 1.510.010, Tax Matters, paragraphs .04 and .05. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (accessed 11 October 2026). Back
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction and questions 4, 5, 7 and 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
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, question 7 (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
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), What's New and "Requirements To Complete Section G". https://www.irs.gov/instructions/i6765 (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, 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. 41, Credit for increasing research activities, subsection (h)(1) to (h)(4), 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

Cite this paper

Summary

1Summary

2Why the fee model matters for a research credit claim

2.1The credit is a number that someone has to calculate

2.2Treasury's stated reasons

3How the federal rules define a contingent fee

3.1Circular 230

3.2The AICPA Code

4The models compared

4.1Fixed fees

4.2Hourly fees

4.3Capped fees

4.4Hybrid fees

4.5Fees for examination support

4.6Figure 1: fee models tested against the Circular 230 definition

5What a fixed or hourly engagement has to define

5.1The work the IRS expects to see

5.2Records

5.3Costs

5.4Examination

6Moving a practice from success fees

6.1Step one: classify every current arrangement

6.2Step two: decide how to treat engagements already under way

6.3Step three: build a pricing method

6.4Step four: separate claim work from examination work

6.5Step five: explain the change to clients

7Objections to fixed and hourly fees

8What this paper does not show

9Our position

References

About this paper

Cite this paper

Summary

1Summary

2Why the fee model matters for a research credit claim

2.1The credit is a number that someone has to calculate

2.2Treasury's stated reasons

3How the federal rules define a contingent fee

3.1Circular 230

3.2The AICPA Code

4The models compared

4.1Fixed fees

4.2Hourly fees

4.3Capped fees

4.4Hybrid fees

4.5Fees for examination support

4.6Figure 1: fee models tested against the Circular 230 definition

5What a fixed or hourly engagement has to define

5.1The work the IRS expects to see

5.2Records

5.3Costs

5.4Examination

6Moving a practice from success fees

6.1Step one: classify every current arrangement

6.2Step two: decide how to treat engagements already under way

6.3Step three: build a pricing method

6.4Step four: separate claim work from examination work

6.5Step five: explain the change to clients

7Objections to fixed and hourly fees

8What this paper does not show

9Our position

References

About this paper

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