Auditor independence and contingent fees

1Summary

An accounting firm that audits a public company may not provide that company with any service for a contingent fee. The rule comes from the Securities and Exchange Commission and the Public Company Accounting Oversight Board, and it covers tax work.12 The AICPA applies the same prohibition to all of its members' attest clients, and adds a separate bar on contingent fees for preparing any client's tax returns or refund claims.3

A firm that prepares a federal research credit claim, does not audit the business, is not a member of a body bound by the AICPA Code, and files the claim before any examination, faces no equivalent federal rule. Treasury's own contingent fee rule cannot be enforced against refund claims filed before an examination, after a 2014 court decision.4

This paper sets out the rules on each side of that line and the reasons the regulators gave for them. It asks whether the reasons that justify the audit rule apply to research credit claims, and where they do not. It sets out the case for treating the two kinds of work differently in its strongest form, and then answers it. It finds that the regulators' stated reason for the audit rule is the mutual interest a contingent fee creates in a result that a government agency may later review, which is also the situation in a research credit claim. Swanson Reed's position is stated once, in a labeled box.

2The audit rule

2.1The SEC rule

The SEC's auditor independence rule, Rule 2-01 of Regulation S-X, sets a general standard. The Commission will not recognize an accountant as independent if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, "capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement".1

The rule's preliminary note explains how the Commission applies that standard. It looks first to whether a relationship or service "Creates a mutual or conflicting interest between the accountant and the audit client; places the accountant in the position of auditing his or her own work; results in the accountant acting as management or an employee of the audit client; or places the accountant in a position of being an advocate for the audit client."1

Applying that standard, the rule states that an accountant is not independent if, at any point during the audit and professional engagement period, it "provides any service or product to an audit client for a contingent fee or a commission, or receives a contingent fee or commission from an audit client".1 A contingent fee is a fee under an arrangement in which no fee is charged unless a specified finding or result is attained, or in which the amount of the fee otherwise depends on the finding or result.1 The SEC's definition excludes fees fixed by courts or other public authorities and, "in tax matters", fees "determined based on the results of judicial proceedings or the findings of governmental agencies".1

2.2The PCAOB rule

In July 2005 the PCAOB adopted Rule 3521, which treats a registered public accounting firm as not independent of its audit client if the firm, or any affiliate, during the audit and professional engagement period "provides any service or product to the audit client for a contingent fee or a commission, or receives from the audit client, directly or indirectly, a contingent fee or commission".2

The PCAOB explained its reasoning directly. It said there was "widespread support among commenters for the Board's view ... that certain fee arrangements used for the provision of tax services create per se conflicts of interest that impair auditors' independence", and that "when an accounting 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

The PCAOB's rule is stricter than the SEC's in one respect that matters for tax work. The Board did not adopt the SEC's exception for fees in tax matters determined by the findings of governmental agencies. It said the exception "may have been misinterpreted in the past" and was largely redundant, and its final rule therefore contains no exception for tax matters in which a fee depends on the results of judicial proceedings or the findings of government agencies.2

The Board relied on a letter from the SEC's Chief Accountant, who had said that the SEC's tax matters exception permits only fee arrangements in which the determination of the fee is "taken out of the hands of the accounting firm and its audit client", so that they "are less likely to share a mutual financial interest in the outcome".2 The Board also quoted the Chief Accountant's view that in the context of contingent fees, "the fact that a government agency might challenge the amount of the client's tax savings . . . heightens . . . the mutuality of interest between the firm and client".2

The rule reaches fees "directly or indirectly" received. The Board said that "regardless of who pays the contingent fee, such a contingency gives an auditor a stake in the audit client attaining the finding or result".2

2.3Tax services that remain permitted

The audit rule does not stop auditors from doing tax work for audit clients. The Sarbanes-Oxley Act lists services an auditor may not provide to an issuer it audits, and provides that a registered firm may engage in any other non-audit service, "including tax services", only if the audit committee approves it in advance.5 The PCAOB requires a firm seeking that approval for a tax service to describe to the audit committee in writing "the scope of the service, the fee structure for the engagement", and any side letter or other agreement relating to the service, and to discuss the potential effects on its independence.2

An auditor may therefore prepare its audit client's research credit claim, if the audit committee approves, but it may not do so for a contingent fee, and the audit committee must be told the fee structure.25

2.4The background

The PCAOB adopted its rules after a period of public concern about tax services provided by auditors. Its release records that a Senate subcommittee had recommended in April 2005 that the Board strengthen and finalize proposed rules restricting firms from, among other things, "charging companies a contingent fee for providing tax services", and that the IRS had noted its support for the Board's proposal.2 This paper relies on the release only for what it records about the Board's reasons.

3The professional code

3.1Attest clients

The AICPA Code of Professional Conduct binds AICPA members. Its contingent fees rule provides that a member in public practice shall not perform for a contingent fee any professional services for, or receive such a fee from, a client for whom the member or the member's firm performs an audit or review of a financial statement, certain compilations, or an examination of prospective financial information.3 The prohibition applies during the engagement and the period covered by the historical financial statements involved.3

3.2Tax returns and refund claims for any client

The Code then goes beyond attest clients. 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".3 Preparation includes giving advice on events that have occurred, if the advice is directly relevant to determining the existence, character or amount of a schedule, entry or other portion of a return or refund claim.3

Like the SEC, the Code excludes fees "determined based on the results of judicial proceedings or the findings of governmental agencies".3 A fee falls within that exclusion only if the member can demonstrate a reasonable expectation, at the time of the arrangement, that a government agency will give the matter substantive consideration, and that expectation "is not reasonable if the member prepares a client's original tax returns".3 The Code's examples of permitted contingent fees include representing a client in an examination and filing an amended return claiming a refund greater than the threshold for review by the Joint Committee on Taxation.3 That threshold is $2,000,000, or $5,000,000 for a C corporation.6 Its example of a fee that is not permitted is a contingent fee for an amended return claiming a refund because a valid deduction was inadvertently omitted from the original return.3

3.3Contingent fees as a self-interest threat

The Code's conceptual framework explains the concern. It describes a self-interest threat as "The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client." Among its examples: "A firm enters into a contingent fee arrangement for a tax refund claim that is not a predetermined fee."3 The Code treats this as a threat to the member's objectivity whether or not the client is an audit client.

3.4State boards

State boards of accountancy license certified public accountants and set their own rules. Some follow the AICPA closely; others differ. California's rule bars a licensee from performing services for a contingent fee for a client for whom the licensee performs an audit, review or other services requiring independence, and also from preparing an original return, or an amended return or refund claim, for a contingent fee for any client.7 Texas bars contingent fees for any services to a client for whom the person performs work requiring independence, and provides that a person shall not prepare an original or amended tax return "for a contingent fee for any client during the period in which the person is engaged to perform" such work.8 New Jersey bars licensees in public practice from receiving a contingent fee for preparing an original or amended tax return or refund claim for any client.9 State rules are described further in a separate paper in this series on state research credits and state fee rules.

4The federal tax practice rule

Treasury regulates practice before the IRS through Circular 230. Its rule provides that a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS, and a matter before the IRS includes "preparing or filing or assisting in preparing or filing returns or claims for refund or credit".10 A contingent fee includes "a fee that is based on a percentage of the refund reported on a return".10

That rule does not depend on an audit relationship. It applies to practitioners whether or not they audit the client. Treasury explained in 2007 that restricting contingent fees for preparing returns "supports voluntary compliance with the Federal tax laws by discouraging return positions that exploit the audit selection process".11

The rule's reach has since been cut back. In 2014 the D.C. Circuit held that Treasury's statutory authority over practice before it "cannot be stretched so broadly as to encompass authority to regulate tax-return preparers", and said that wider regulation was "a decision for Congress and the President to make if they wish by enacting new legislation".12 A district court then 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 enjoined enforcement of the contingent fee rule to that extent.4

In December 2024 Treasury and the IRS proposed to treat a contingent fee for preparing an original or amended return or refund claim before examination as disreputable conduct. They wrote: "A practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits."13 The proposal cited the AICPA's self-interest threat example and the rules of several state boards.13 It would apply only to practitioners, and a Federal Register search on 11 October 2026 found no final rule.13

5Who is covered

The result is that the same fee, for the same work on a federal research credit refund claim filed before any examination, is treated differently depending on who charges it.

Who prepares the claim	Rule that bars a contingent fee	Source
The business's auditor, where the business is an SEC issuer	Barred for any service; tax services also need audit committee approval with the fee structure disclosed	SEC Rule 2-01(c)(5); PCAOB Rules 3521 and 3524; Sarbanes-Oxley Act125
A CPA firm that audits a private business	Barred for any service while the attest relationship lasts	AICPA ET 1.510.001.01a; state board rules37
An AICPA member that does not audit the business	Barred for preparing the return or refund claim, unless substantive review by an agency is reasonably expected	AICPA ET 1.510.001.01b and 1.510.0103
A Circular 230 practitioner, for a refund claim filed before examination	Rule on the books, but enforcement enjoined for such claims	31 CFR 10.27; Ridgely v. Lew104
A preparer with no professional credential who does not practice before the IRS	None	IRS credentials guidance14

Figure 1. Federal and professional rules on contingent fees for preparing a federal research credit refund claim filed before examination, by who prepares it.

The IRS describes a category of paid preparers who have an active preparer tax identification number but no professional credentials, and who are authorized to prepare tax returns.14 Neither the audit rules nor the AICPA Code reach them. A specialist firm that prepares research credit claims may fall in this group, or may employ credentialed staff; the point is that whether a fee rule applies depends on the preparer's status, not on the work.

6Do the reasons for the audit rule apply to research credit claims?

6.1What the audit rule protects

The audit rule exists because investors rely on an auditor's opinion. The SEC's general standard asks whether a reasonable investor would conclude that the accountant is capable of objective and impartial judgment.1 A firm that prepares a research credit claim does not give investors an opinion. In that sense the audit rule's first purpose does not carry over.

6.2The mutual interest

The regulators also gave a second reason, which does carry over. The PCAOB said a contingent fee aligns the firm's economic interests with its client's.2 The SEC's Chief Accountant said the risk that a government agency might challenge the client's tax savings heightens the mutuality of interest.2 The tax matters exception was justified only where the fee is "taken out of the hands of the accounting firm and its audit client".2

A research credit claim fits that description closely. The amount of the credit is determined in the first instance by the claim preparer's judgments about business components, experimentation and the allocation of costs. It is then reviewed by the IRS only if the claim is selected. The IRS has said that it examines research credit claims "in a substantial number of cases", but the IRS sources reviewed for this paper do not say how many.15 Its 2008 examiner guide, which states that it is not an official pronouncement of IRS position, told examiners that "Some fee agreements shift ultimate control over the resolution of the claim to the preparer."16 A fee that depends on how much credit survives is not taken out of the hands of the preparer and the client. It depends on the outcome of the very review the Chief Accountant had in mind.

6.3The professional code's answer

The AICPA has already answered the question for its own members. It does not limit the self-interest threat to audit clients: its example is a contingent fee "for a tax refund claim", and its rule bars contingent fees for preparing any client's original or amended return or refund claim.3 Treasury's 2024 proposal adopts the same reasoning for practitioners.13 The remaining difference is not one of principle but of reach.

6.4The consequences for the client

When an audit client's tax position fails, the consequences fall on the company and, through its financial statements, on its investors. When a research credit claim fails, the consequences fall on the business. A person who makes a refund claim for an excessive amount is liable for a penalty of 20 percent of the excess unless there was reasonable cause.17 The preparer may owe its own penalty if the understatement results from an unreasonable position.18 No federal rule requires the preparer to refund a contingent fee.

7The case for treating the two differently

The argument that specialist claim preparers should remain free to charge contingent fees deserves to be set out in its strongest form.

Different roles. An auditor must be independent of its client because its job is to check the client's statements for others. A claim preparer is engaged to make the client's case. Advocacy is the purpose of the engagement, not a threat to it. Rules designed for an independent checker should not be applied to an advocate.

No third-party reliance. Investors rely on an audit opinion without being able to test it. The IRS does not rely on a research credit claim in that way. It is an expert counterparty with examination powers, information requirements and penalties at its disposal.1718

The IRS can review. The SEC and the AICPA accept contingent fees in tax matters where a government agency's findings determine the fee.13 On this view, a research credit claim is a matter that the IRS will review if it chooses, and the fee follows the IRS's decision.

Access and cost. A contingent fee lets a business claim a credit without paying in advance and leaves the adviser bearing the cost if no credit is found. These benefits matter most to smaller businesses, which are least able to pay upfront. Commenters made this point to Treasury in 2007, saying that its proposed restrictions "prohibited some small and middle market taxpayers from appropriately requesting refunds".11

Penalties already apply. Preparers are subject to penalties for unreasonable positions whatever their fee.18

These arguments describe real differences. Nothing in this paper suggests that advisers who charge contingent fees act improperly.

8Answering the case

Different roles. The audit rule has two foundations: third-party reliance and mutual interest. The first does not apply to a claim preparer. The second does. The AICPA Code, which governs advocates as well as auditors, treats a contingent fee on a refund claim as a self-interest threat for exactly that reason.3 A claim preparer is expected to advocate within the law; a fee that rises with the size of the claim rewards the size, not the accuracy.

Reliance and review. The IRS can examine a claim, but the IRS sources reviewed for this paper do not say how many research credit claims it examines.15 The SEC's own exception, and the AICPA's, require more than the possibility of review. The AICPA requires a reasonable expectation of substantive consideration, and finds none where the member prepares the original return.3 The PCAOB went further and removed the exception for auditors altogether.2

Access and cost. Low upfront cost can be provided without tying the fee to the result: a fixed fee, a capped fee or a fee paid after the credit is received. Treasury's definition of a contingent fee concerns how a fee is calculated, not when it is paid.10

Penalties. Penalties operate after the event and are measured partly by the preparer's income from the claim.18 They do not address how that income was calculated.

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 paper, is a fixed-fee R&D tax adviser. It has a direct commercial interest in the outcome: it does not charge success fees, and a ban would remove a pricing model it competes against.

9What the record does and does not show

What the record shows:

Auditors of SEC issuers may not provide any service to an audit client for a contingent fee, and the PCAOB removed the exception for tax matters decided by government agencies.12
The regulators' stated reason is the mutual interest a contingent fee creates, heightened where a government agency may challenge the client's tax savings.2
The AICPA Code applies the same concern to tax returns and refund claims for any client of its members.3
Treasury's own rule for refund claims cannot be enforced against claims filed before examination, and its 2024 proposal would reach only practitioners.413
Preparers without credentials who do not practice before the IRS are not covered by any of these rules.14

What the record does not show:

How many federal research credit claims are prepared by firms outside these rules.
How claims prepared under contingent fees fare on examination compared with others.
How many research credit claims the IRS examines each year.

Form 6765 does not ask how the preparer of a claim was paid.19 Until it does, the effect of the gap described in this paper cannot be measured from official data. The argument rests on the reasons the regulators themselves gave.

References

Securities and Exchange Commission, 17 CFR 210.2-01, Qualifications of accountants (Regulation S-X Rule 2-01), 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), summary, pages 7 to 8, 18 to 21 (with footnotes 37, 40 and 41) and 24 (with footnote 46), and Appendix 1, Rules 3501(c)(ii), 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 paragraphs .08 and .14, ET 1.510.001 Contingent Fees Rule paragraphs .01 to .03, and ET 1.510.010 Tax Matters paragraphs .02 to .05. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.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
26 U.S.C. 6405, Reports of refunds and credits, subsection (a), as reproduced by the Legal Information Institute, Cornell Law School (uscode.house.gov was under maintenance on the access date). https://www.law.cornell.edu/uscode/text/26/6405 (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, Contingent Fees. https://www.dca.ca.gov/cba/about/cba_regs.pdf (accessed 11 October 2026). Back
Texas State Board of Public Accountancy, 22 Texas Administrative Code 501.72, Contingency Fees, subsections (a) and (b), and 501.52(10), as reproduced by the Legal Information Institute, Cornell Law School. https://www.law.cornell.edu/regulations/texas/22-Tex-Admin-Code-SS-501-72 (accessed 11 October 2026). Back
New Jersey State Board of Accountancy, N.J.A.C. 13:29-3.8, Contingent fees, subsections (c) and (e), as reproduced by the Legal Information Institute, Cornell Law School. https://www.law.cornell.edu/regulations/new-jersey/N-J-A-C-13-29-3-8 (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
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
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
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 and proposed section 10.51(b). https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026; a Federal Register search on that date for documents with this title published from 1 December 2024 returned only this proposed rule). 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
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. 6676, Erroneous claim for refund or credit, 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-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
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), Sections A to G and "Research Credit Claims on Amended Returns" (page last reviewed or updated 30 April 2026). https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back

Cite this paper

Summary

1Summary

2The audit rule

2.1The SEC rule

2.2The PCAOB rule

2.3Tax services that remain permitted

2.4The background

3The professional code

3.1Attest clients

3.2Tax returns and refund claims for any client

3.3Contingent fees as a self-interest threat

3.4State boards

4The federal tax practice rule

5Who is covered

6Do the reasons for the audit rule apply to research credit claims?

6.1What the audit rule protects

6.2The mutual interest

6.3The professional code's answer

6.4The consequences for the client

7The case for treating the two differently

8Answering the case

9What the record does and does not show

References

About this paper

Cite this paper

Summary

1Summary

2The audit rule

2.1The SEC rule

2.2The PCAOB rule

2.3Tax services that remain permitted

2.4The background

3The professional code

3.1Attest clients

3.2Tax returns and refund claims for any client

3.3Contingent fees as a self-interest threat

3.4State boards

4The federal tax practice rule

5Who is covered

6Do the reasons for the audit rule apply to research credit claims?

6.1What the audit rule protects

6.2The mutual interest

6.3The professional code's answer

6.4The consequences for the client

7The case for treating the two differently

8Answering the case

9What the record does and does not show

References

About this paper

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