Engagement contract terms

1Summary

A research credit claim is usually prepared under a written engagement letter.1 The 2008 IRS guide for examiners of research credit claims told examiners to request the engagement letter with their first information request, and to consider a summons if the taxpayer refused to provide it.1 The guide gave three reasons the letter mattered, and it flagged one term in particular: where a fee depends on the final amount of the claim, "Some fee agreements shift ultimate control over the resolution of the claim to the preparer."1

This paper examines four engagement terms that bear on how a claim is priced and how it is handled if it is questioned. They are commitments that run for several years, automatic renewal, fees calculated on the gross amount of the claim, and what happens to the fee after an examination or enquiry. It sets out what federal rules, professional codes and tax authorities in other countries say about each term, and where they are silent.

It finds that federal tax law regulates how a fee is calculated for many practitioners but says little about the length, renewal or refund terms of an engagement. Under the 2014 Ridgely v. Lew decision, the IRS cannot apply its contingent fee rule to ordinary refund claims filed before an audit.2 Tax authorities in Canada and the United Kingdom have published warnings about such terms. A fee calculated on the gross credit can exceed the benefit the company receives. The paper sets out the case for these terms fairly before answering it. Swanson Reed's position is stated once, in a labeled box.

2Why the engagement letter matters

2.1What the IRS told its examiners

The 2008 Research Credit Claims Audit Techniques Guide states that it is not an official pronouncement of the law or the position of the IRS and cannot be relied on as such.1 It is cited here as a record of what the IRS told its examiners.

The guide said research credit claims "are usually based upon a Research Credit Study prepared by an outside consultant" under an engagement letter.1 It described a typical study as having phases, the first being an initial evaluation of whether the taxpayer is entitled to the credit, and noted that "An engagement letter may be prepared before the feasibility assessment and then updated or revised based upon the findings of the study."1 It said the letter gives "valuable insight into how the consultant conducted and prepared its Research Credit study", and that it would help examiners decide whether the taxpayer had entered into a reportable transaction, including a transaction with contractual protection.1

Among the points examiners were asked to consider, under the heading of contingency fees, was this one: "If the fee is based on the ultimate determination of the claim amount there may be a limitation on to ability [sic] of the taxpayer to resolve the issue. Some fee agreements shift ultimate control over the resolution of the claim to the preparer."1 The wording is the guide's own.

2.2What the claim form asks

Form 6765 and its instructions do not ask who prepared the claim or on what terms.3 Canada takes a different approach: a claimant using a third party to prepare an SR&ED claim must give, in Part 9 of Form T661, the preparer's name, business number and billing information, and the total fees paid, payable or expected to be paid.4 This paper makes no recommendation about Canadian practice.

3Commitments that run for several years

3.1What the official sources say

No provision of Circular 230 or the AICPA Code read for this paper addresses how long an engagement may last or whether it may renew automatically.56 Those terms are a matter for the contract between the parties.

Two tax authorities have addressed them directly. In guidance to dental professionals approached by third parties offering SR&ED claims, the CRA advised businesses that decide to use a third-party preparer to "Read the terms and conditions of any contract you are asked to sign in detail. Make sure you understand the terms of the fees listed in the contract and any termination clauses", and to "Be cautious of contracts that make you commit to filing SR&ED claims for multiple tax years."4

HMRC's standard for agents, which is not law, says agents should make their terms of engagement as clear and simple as possible, including "the rights that both agents and their clients have to end the arrangement early or individually". It says agents should agree terms before starting to act and "offer clients a reasonable cancellation period during which they can cancel any agreement they have entered into".7 HMRC has also told businesses considering an agent to "always read the terms and conditions, read any disclaimers carefully, and make sure they fully understand any fees the agent will charge".8

3.2Why the term matters for a research credit

A research credit is claimed year by year, and each year's claim stands or falls on its own facts.9 A commitment to have the same adviser prepare claims for several years, on a fee calculated as a share of each year's credit, extends the fee arrangement to claims whose size is not known when the contract is signed. Where the contract renews automatically, the company may remain bound unless it gives notice within a set period.

A multi-year commitment can also affect the company's ability to change adviser. Circular 230 requires a practitioner, at a client's request, to return promptly the client's records needed to comply with federal tax obligations, and states that a fee dispute "generally does not relieve the practitioner" of that duty, although documents the practitioner prepared may be withheld pending payment of fees for them.5 The AICPA Code provides that client-provided records may not be withheld for nonpayment of fees, but that a member's work products, such as tax returns, may be withheld where fees are due for that specific work product.6 A study prepared under a contingent engagement may be the main record supporting a claim. Whether the company may use it with another adviser, or in an examination, depends on the contract and these rules.

3.3Earlier years

A multi-year engagement may also look backward. A credit for an earlier year is claimed on an amended return, and a claim for refund must generally be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever is later.1011 HMRC has said that UK measures were designed to limit "the ability of agents who facilitate spurious claims to do so for earlier years where a company has correctly not previously claimed the relief", and to protect businesses from agents "who try to pressure them into making non-compliant historic claims".12 Those statements concern the United Kingdom. They show a tax authority treating claims for past years, marketed to companies that had not claimed, as a particular risk.

4Fees on the gross claim

4.1What the gross claim can mean

A fee stated as a percentage of "the credit" or "the claim" needs a base. For the federal research credit, the gross figure and the benefit the company receives can differ in at least four ways.

The Section 280C reduction. A company that claims the credit must either elect a reduced credit under Section 280C or reduce its research expenditures otherwise deducted or capitalized by the amount of the credit.3 For the regular credit, Form 6765 multiplies the relevant amount by 15.8 percent instead of 20 percent where the reduced credit is elected; for the alternative simplified credit, the reduced figure is 79 percent of the full amount.3 Either way, the net benefit to the company is less than the gross credit.

Credits that cannot yet be used. The credit offsets income tax subject to a limitation, and unused credits are carried back one year and forward twenty.13 A company with no income tax to pay may earn a credit it cannot use for years.

The payroll tax election. An amount elected against payroll tax is used quarter by quarter from the first quarter after the return is filed, and any excess carries forward to later quarters.1415

Later adjustment. A credit may be reduced on examination. The company then repays the excess, with interest, and may owe a penalty of 20 percent of the excessive amount of a refund claim unless there is reasonable cause.1617

4.2Illustrative arithmetic

The following figures are illustrative only and use round numbers. Suppose a company's regular credit is computed at $100,000 and it elects the reduced credit, so that the credit claimed is $79,000. A fee of 20 percent of the gross computed credit is $20,000; a fee of 20 percent of the credit actually claimed is $15,800. If the company has no income tax to pay for three years, the fee on either base may fall due long before the company obtains any benefit. If an examination later reduces the claimed credit to $50,000, a fee calculated on the $79,000 claimed has been charged on $29,000 of credit the company does not keep, and a fee calculated on the $100,000 gross figure on $50,000; the company also repays the $29,000 with interest.

4.3What tax authorities have said

HMRC's guidance on correcting an overclaim states: "Some agents deduct their fees before paying clients the balance of their R&D claim. If an agent made your company's claim, you must include the full amount of overclaimed R&D relief in your offer, not the net amount you received."18 The company repays the gross amount, even where it received only the net.

The IRS reached a similar point for the employee retention credit, a different, refundable credit. When it set up a voluntary disclosure program it required repayment of 80 percent of the credit received, explaining that "many of the ERC promoters charged a percentage fee that they collected at the time of payment or in advance of the payment, and the recipients never received the full amount".19 That record concerns a different credit and is not evidence about research credit advisers. It shows the IRS recognizing that a fee calculated on the gross payment leaves the taxpayer exposed for the gross amount.

HMRC's standard for agents says terms of engagement should explain "how the agent is to be paid", "how any repayment of tax owed will reach the client" and "details of deductions that will be made by the agent from any repayment".7 Federal law takes a firmer line on refunds passing through an adviser: Circular 230 bars a practitioner from endorsing or negotiating a client's government refund check, including by directing the payment into an account the practitioner controls.5

5What happens to the fee after an examination

5.1Who handles the examination

When a claim is questioned, the company needs someone to explain and defend it. HMRC has recorded that "In some cases, agents who have advised a customer, or have put in a claim on their behalf, are unwilling to engage with a subsequent compliance check", and that HMRC "understands the impact it can have on claimants where a claim is subject to a compliance check and the agent stops acting on their behalf".8 Whether an adviser must support the company through an examination, and at what cost, depends on the engagement letter.

5.2Contingent fees for examination work

Circular 230 generally prohibits contingent fees for matters before the IRS, but allows them for services in connection with an IRS examination of, or challenge to, an original return, or an amended return or refund claim filed within 120 days of a written notice of examination or challenge.5 An engagement may therefore lawfully tie a practitioner's fee for defending a claim to the outcome of the examination, even where the fee for preparing the claim could not be contingent.

The 2008 examiner guide's concern applies at this stage. Where the fee depends on the final amount, the adviser has a financial interest in how the examination is resolved, and "Some fee agreements shift ultimate control over the resolution of the claim to the preparer."1 Circular 230 treats a significant risk that representation will be materially limited "by a personal interest of the practitioner" as a conflict of interest, which a practitioner may proceed with only on the client's informed consent confirmed in writing, among other conditions.5

5.3Refunds of the fee

An engagement letter may promise to refund some or all of the fee if a claim is reduced. Circular 230 treats such a promise as a contingent fee in its own right: a contingent fee "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".5 Under the 2014 Ridgely v. Lew decision, however, the IRS cannot apply that rule to ordinary refund claims filed before an audit.2 The examiner guide also linked the engagement letter to the reportable transaction rules on contractual protection.1

No federal rule requires an adviser to refund a contingent fee when a claim is reduced. The professional guidance in the United Kingdom addresses the point. The CIOT and ATT Professional Rules and Practice Guidelines advise that where contingent fees are used, the engagement letter should "stipulate the action to be taken should subsequent events cancel all or part of the benefits to the client of the contingent fee arrangement", and "set out clearly and precisely whether part or the entire fee is to be repaid and whether interest is payable".20 This paper makes no recommendation about UK practice.

5.4The company's position

Whatever the contract says about the fee, the tax consequences of a reduced claim fall on the company. The person making an excessive refund claim is liable for a penalty of 20 percent of the excessive amount unless it is due to reasonable cause, and interest runs on unpaid tax from the date it was due.1617 The CRA tells claimants that they are "legally responsible even if you have been misled by third party promotions".4

Term	What federal rules say	What tax authorities abroad have said
Multi-year commitment	No rule found on length or renewal; records must be returned on request56	CRA: be cautious of contracts committing to claims for multiple years4
Cancellation	No rule found	HMRC standard: offer a reasonable cancellation period7
Fee on gross claim	Fee as a percentage of a refund is a contingent fee for practitioners, though under Ridgely v. Lew (2014) the IRS cannot apply the rule to ordinary refund claims filed before an audit52	HMRC: overclaims are repaid in full, not net of agent fees18
Fee after examination	Contingent fees allowed for examination work; a refund promise is itself a contingent fee5	PRPG: say whether the fee is repaid if the benefit is cancelled20

6The case for these terms

The terms discussed here exist for reasons, and those reasons should be stated in their strongest form.

Multi-year commitments spread the cost of learning the business. The first year of a research credit engagement involves learning a company's projects, people and records. A commitment over several years lets an adviser recover that investment and offer a lower rate for each year. It also gives the company continuity, which can help with consistency between years.

Renewal saves effort. A renewing contract means the claim is prepared each year without a new procurement.

A fee on the gross credit is simple. The gross credit is the figure on the form. A fee calculated on it is easy to compute and to check, and the company knows the rate when it signs.

Examination support and fee refunds protect the client. An adviser that includes examination defense, or promises to refund its fee if the claim is reduced, takes on risk that would otherwise fall entirely on the company.

These are legitimate commercial considerations, and nothing in this paper suggests that advisers who use such terms act improperly.

7Our answer (Swanson Reed's position)

This section is Swanson Reed's view.

7.1Continuity does not require a percentage

The benefit of continuity can be secured by a contract that prices each year's work. A multi-year commitment combined with a fee calculated as a share of each year's credit commits the company to paying for claims whose size is not known, on a basis that rises with their size. The CRA's warning addresses that combination.4

7.2Simplicity can hide the gap between gross and net

A fee on the gross figure is simple, but the gross figure is not what the company keeps. The Section 280C reduction, carryforwards and later adjustments can all reduce the benefit below the base on which the fee was charged, while the company remains liable for the full amount if the claim is reduced.31318

7.3Refund promises do not remove the incentive

A promise to refund the fee if the claim fails gives the adviser a stake in the claim surviving examination. Treasury treats that as a contingent fee for the same reason it treats a percentage fee as one: the adviser's pay depends on the result.5 It also gives the adviser a financial interest in how an examination is resolved, which is the concern the IRS examiner guide recorded.1

7.4The terms are hard to see

None of these terms is reported on Form 6765.3 A company signing an engagement letter may not know what questions to ask, and the tax authority does not see the answers. Treasury has said that "A practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits", in proposing to treat contingent fees for preparing returns and refund claims as disreputable conduct; that proposal is not final.21

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. Engagement terms would then price the work, whatever their length or renewal terms. Swanson Reed, which publishes this paper, is a fixed-fee R&D tax adviser. It has a direct commercial interest in the outcome: SR Tax Services LLC does not charge success fees, and a ban would remove a pricing model it competes against.

8What the record does and does not show

What the record shows:

IRS examiner guidance treats the engagement letter as central to evaluating a research credit claim and records that some fee agreements shift control over resolution to the preparer.1
The CRA has warned businesses about contracts committing them to claims for multiple years, and HMRC's standard for agents calls for clear exit rights and a cancellation period.47
HMRC and the IRS have each recorded that fees deducted from payouts leave taxpayers liable for the gross amount.1819
Circular 230 treats a fee refund promise as a contingent fee and permits contingent fees for examination work, although under the 2014 Ridgely v. Lew decision the IRS cannot apply its contingent fee rule to ordinary refund claims filed before an audit.52

What the record does not show:

How common multi-year, renewing or gross-fee terms are in federal research credit engagements. No official source found for this paper collects engagement terms.
How fees are treated in practice when claims are reduced. No federal form asks, and no IRS publication found for this paper reports it.

The analysis here therefore rests on the text of the rules and on official statements, not on a survey of contracts.

References

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; Chapter I, "Typical Prepackage RC Claim Study"; Chapter II, "Additional areas to consider" and "The RC Claim Engagement Letter". https://www.irs.gov/businesses/research-credit-claims-audit-techniques-guide-rccatg-credit-for-increasing-research-activities-section-41 (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, 13 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), "Section 280C election", "Item A, Section 280C Election", and the instructions for lines 13 and 26. https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Canada Revenue Agency, SR&ED news and updates, item "Dentistry professionals: look out for third parties promising access to SR&ED tax incentives". https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/sred-updates.html (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR part 10, sections 10.27(b) and (c), 10.28(a) and (b), 10.29(a) and (b), and 10.31(a). https://www.ecfr.gov/current/title-31/subtitle-A/part-10 (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 1.400.200 Records Requests, paragraphs .01, .06 and .07, and ET 1.510.001 Contingent Fees Rule. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (accessed 11 October 2026). Back
HM Revenue and Customs, The HMRC standard for agents (updated 9 February 2026), section 4.3.3. https://www.gov.uk/government/publications/hmrc-the-standard-for-agents/the-hmrc-standard-for-agents (accessed 11 October 2026). Back
HM Revenue and Customs, Approach to Research and Development tax reliefs 2023 to 2024 (published 30 October 2024), section 2.5. 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
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, 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-subtitleA-chap1-subchapA-partIV-subpartD-sec41.htm (accessed 11 October 2026). Back
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction (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
Office of the Law Revision Counsel, 26 U.S.C. 6511, Limitations on credit or refund, 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-chap66-subchapB-sec6511.htm (accessed 11 October 2026). Back
HM Revenue and Customs, HMRC's approach to Research and Development tax reliefs (published 17 July 2023), sections 1.2 and 2.1. https://www.gov.uk/government/publications/compliance-approach-to-research-and-development-tax-reliefs/hmrcs-approach-to-research-and-development-tax-reliefs (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 39, Carryback and carryforward of unused credits, 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-sec39.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 3111, Rate of tax, subsection (f)(1) and (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-subtitleC-chap21-subchapB-sec3111.htm (accessed 11 October 2026). Back
Internal Revenue Service, Qualified small business payroll tax credit for increasing research activities (page last reviewed or updated 28 June 2026). https://www.irs.gov/businesses/small-businesses-self-employed/qualified-small-business-payroll-tax-credit-for-increasing-research-activities (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. 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
HM Revenue and Customs, Tell HMRC if you've claimed too much Research and Development (R&D) tax relief (published 31 December 2024, last updated 14 August 2026), section "Make your disclosure". https://www.gov.uk/guidance/tell-hmrc-if-youve-claimed-too-much-research-and-development-rd-tax-relief (accessed 11 October 2026). Back
Internal Revenue Service, IRS new Voluntary Disclosure Program lets employers who received questionable Employee Retention Credits pay them back at discounted rate, News release IR-2023-247, 21 December 2023. https://www.irs.gov/newsroom/irs-new-voluntary-disclosure-program-lets-employers-who-received-questionable-employee-retention-credits-pay-them-back-at-discounted-rate-interested-taxpayers-must-apply-by-march-22 (accessed 11 October 2026). Back
Chartered Institute of Taxation and Association of Taxation Technicians, Professional Rules and Practice Guidelines (effective 9 November 2018, updated 1 January 2021), paragraph 8.2.3. https://www.att.org.uk/sites/default/files/PRPG%20%28Update%201.1.2021%29%20-%20Final.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. 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 docket search on that date showed only the proposed rule). Back

Cite this paper

Summary

1Summary

2Why the engagement letter matters

2.1What the IRS told its examiners

2.2What the claim form asks

3Commitments that run for several years

3.1What the official sources say

3.2Why the term matters for a research credit

3.3Earlier years

4Fees on the gross claim

4.1What the gross claim can mean

4.2Illustrative arithmetic

4.3What tax authorities have said

5What happens to the fee after an examination

5.1Who handles the examination

5.2Contingent fees for examination work

5.3Refunds of the fee

5.4The company's position

6The case for these terms

7Our answer (Swanson Reed's position)

7.1Continuity does not require a percentage

7.2Simplicity can hide the gap between gross and net

7.3Refund promises do not remove the incentive

7.4The terms are hard to see

8What the record does and does not show

References

About this paper

Cite this paper

Summary

1Summary

2Why the engagement letter matters

2.1What the IRS told its examiners

2.2What the claim form asks

3Commitments that run for several years

3.1What the official sources say

3.2Why the term matters for a research credit

3.3Earlier years

4Fees on the gross claim

4.1What the gross claim can mean

4.2Illustrative arithmetic

4.3What tax authorities have said

5What happens to the fee after an examination

5.1Who handles the examination

5.2Contingent fees for examination work

5.3Refunds of the fee

5.4The company's position

6The case for these terms

7Our answer (Swanson Reed's position)

7.1Continuity does not require a percentage

7.2Simplicity can hide the gap between gross and net

7.3Refund promises do not remove the incentive

7.4The terms are hard to see

8What the record does and does not show

References

About this paper

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