Policy options for Congress

1Summary

This paper sets out the options available to Congress on one question: how advisers who prepare federal research credit claims under Section 41 are paid, and how they are held to account. It describes each option, what it would and would not do, and its trade-offs.

The starting point is a gap in the present rules. Treasury's practice rules restrict contingent fees, but they bind only practitioners such as attorneys, certified public accountants and enrolled agents.12 In 2014 the D.C. Circuit held that Treasury's authority over practice before it does not extend to regulating tax return preparers, and said that wider regulation "is a decision for Congress and the President".3 A district court then held that the IRS cannot apply its contingent fee rule to refund claims filed before an audit.4 Treasury proposed a new approach in December 2024, but it would still apply only to practitioners, and it has not been finalized.5

Congress has recently looked at this area from both directions. The House passed a 2025 bill containing a provision that would have barred Treasury from restricting contingent fees on returns and refund claims; the enacted law does not contain it.67 A separate 2025 bill would give Treasury authority to regulate all paid preparers.8 Treasury itself proposed a penalty on taxpayers who fail to disclose a paid preparer and the fees paid.9

The paper groups the options into those that leave the fee structure in place and those that change it. Swanson Reed's position is stated once, in a labeled box. The options are described fairly whether or not they match it.

2The present law

2.1Circular 230

Section 10.27 of Circular 230 provides that a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS, which includes preparing returns and claims for refund, except in connection with an IRS examination of, or challenge to, an original return or a refund claim filed within 120 days of a written notice of examination, for claims relating solely to statutory interest or penalties, and in judicial proceedings.1 A contingent fee includes a fee based on a percentage of the refund reported on a return or of the taxes saved.1

The rule rests on Treasury's statutory power to regulate the practice of representatives of persons before the Department, and to censure, suspend or disbar a representative who is incompetent or disreputable or who breaks its regulations.2

2.2The court decisions

In Loving v. IRS the D.C. Circuit held that this authority "cannot be stretched so broadly as to encompass authority to regulate tax-return preparers".3 In Ridgely v. Lew, a district court held that the IRS lacks statutory authority to regulate the preparation and filing of "Ordinary Refund Claims", which it described as refund claims filed after the original return but before the IRS has begun an audit, and permanently enjoined enforcement of the contingent fee rule in that respect.4 The court noted that, on the IRS's reading, the rule would impose no contingent fee restrictions on such claims prepared by those who never practice before the IRS.4

2.3The 2024 proposal

In December 2024 Treasury and the IRS proposed to remove section 10.27 and instead treat 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".5 The proposal relies on Treasury's power to sanction practitioners for disreputable conduct "whether or not the conduct constitutes representation of a client".5 It would therefore apply only to practitioners. A Federal Register docket search on 11 October 2026 found no final rule.5

2.4The preparer rules that reach everyone

Some rules reach every paid preparer. Any person who prepares a return or refund claim, or a substantial portion of one, for compensation is a tax return preparer.10 A preparer whose return or claim understates liability because of an unreasonable position it knew or should have known of owes the greater of $1,000 or 50 percent of its income from the return or claim, and more for willful or reckless conduct.11 An understatement includes an overstatement of the amount creditable or refundable.11 Courts may enjoin a preparer who has engaged in penalized conduct or guaranteed the allowance of a tax credit.12 Separately, a preparer who endorses or negotiates a refund check issued to a taxpayer owes a penalty of $500 for each check.13

The taxpayer bears its own consequences. A refund claim for an excessive amount carries a penalty of 20 percent of the excess on the person making the claim, unless there is reasonable cause.14

2.5What the claim shows

Form 6765 asks for detailed information about business components and expenses, but its instructions make no reference to a preparer or a fee.15 The return identifies the preparer who signs it.16 A person who prepares the credit calculation without signing may be a nonsigning preparer under the regulations, but the return does not record that person.1617

3Recent proposals

3.1A House provision restricting Treasury

H.R. 1 in the 119th Congress, as passed by the House on 22 May 2025, contained section 112208: "The Secretary of the Treasury may not regulate, prohibit, or restrict the use of a contingent fee in connection with tax returns, claims for refund, or documents in connection with tax returns or claims for refund prepared on behalf of a taxpayer."6 The Senate passed the bill with an amendment on 1 July 2025, and it became Public Law 119-21 on 4 July 2025.18 The enacted text does not contain that provision.7

The provision shows that some members have favored removing federal restrictions on contingent fees altogether.

3.2Treasury's revenue proposals

Treasury's explanation of the Administration's fiscal year 2025 revenue proposals asked Congress for explicit authority to regulate all paid preparers of federal tax returns, including mandatory minimum competency standards.9 It also proposed raising the preparer penalties to the greater of $5,000 or 50 percent of income for unreasonable positions and $10,000 or 100 percent for willful or reckless conduct, and a new penalty of $500 "for each failure by a taxpayer to disclose the use of a paid tax return preparer and the fees paid to such a preparer".9 Treasury said that with this disclosure the IRS "will be better positioned to identify preparers perpetuating fraud that harms taxpayers".9

3.3A bill on preparer regulation

H.R. 1983, the Tax Return Preparer Accountability Act of 2025, was introduced on 10 March 2025 and referred to the Committee on Ways and Means.819 It would amend Treasury's statutory authority to cover "the practice of tax return preparers" and require preparers to meet minimum competency standards through an identifying number, examination and continuing education requirements, and a background check, with an exemption for those subject to comparable state licensing.8 The congress.gov record shows no action on the bill after referral.19

4Options that leave the fee structure in place

Options 1 to 8 leave the basis of the fee unchanged, though Options 1 and 7 would restrict it for practitioners. Option 9 changes it for everyone who prepares a research credit claim.

4.1Option 1: leave the matter to Treasury

Congress could take no action and allow Treasury to finalize its 2024 proposal.

What it would do. Practitioners who charge contingent fees for returns and pre-examination refund claims would face discipline for disreputable conduct.5
What it would not do. It would not reach preparers who are not practitioners, because it rests on Treasury's power over practitioners.52 Its reach would depend on how courts read that power after Loving and Ridgely.34
Trade-offs. No legislation is needed. The rule could change with each rulemaking, and Congress could also legislate the other way, as the 2025 House provision shows.6

4.2Option 2: disclosure of the fee on the claim

Congress could require, or direct Treasury to require, every research credit claim to state whether a paid preparer was used and how that preparer was paid.

Precedent. Treasury's fiscal year 2025 proposal included a $500 penalty on taxpayers who fail to disclose a paid preparer and the fees paid.9 Canada has required each SR&ED claim preparer's billing arrangement, including whether it is a contingency fee, and the total fee, on its claim form since 2014.2021
What it would do. It would create the first official record of how US research credit claims are paid for, and let the IRS use fee structure in selecting claims for review.
What it would not do. It would not change the incentive. A disclosed contingent fee still rises with the claim.
Trade-offs. The claimant already knows the information, since it agreed the fee, so the reporting burden is limited. Disclosure is accurate only if the person making it is accurate, which is why Canada attached a penalty for which the claimant and preparer are jointly liable.20

4.3Option 3: identify the person who prepared the credit

Congress could require the person who prepared the credit calculation, and not only the signing preparer, to be named on Form 6765.

What it would do. It would close the gap between the regulations, which already treat such a person as a preparer, and the form, which does not record them.1617
What it would not do. It would not address the fee.
Trade-offs. It would make preparer penalties easier to apply, since the IRS would know whom to examine. It would add a small reporting burden.

4.4Option 4: stronger penalties and shared liability

Congress could raise preparer penalties, as Treasury proposed, or make a preparer paid on a contingent basis share liability for the taxpayer's penalty where a claim is overstated.

What it would do. It would raise the cost to the preparer of an overstated claim.
What it would not do. Penalties apply after the event and require the IRS to prove fault.11 They leave the fee in place.
Trade-offs. Higher penalties affect all preparers, not only those paid on results. Shared liability would need a clear test of when it applies.

4.5Option 5: restrict who receives the refund

Congress could provide that research credit refunds be paid only to the taxpayer, and not assigned or directed to an adviser.

Precedent. The United Kingdom generally pays R&D tax credits only to the claimant company for claims made on or after 1 April 2024, and HMRC said this would reduce "the financial incentive for agents to overstate claims".2223 US law already penalizes a preparer who negotiates a taxpayer's refund check.13
What it would do. It would stop a fee from being taken from the refund before the taxpayer receives it.
What it would not do. It would not change how the fee is calculated.

4.6Option 6: general authority over paid preparers

Congress could give Treasury the authority over all paid preparers that Loving found it lacked, as H.R. 1983 and Treasury's proposal would do.89

What it would do. It would allow Treasury to set competency standards and conduct rules, potentially including fee rules, for everyone who prepares returns and claims for pay.
What it would not do. By itself it would not prohibit any fee. Whether a contingent fee rule followed would depend on later rulemaking.
Trade-offs. It is broad: it reaches every paid preparer of every return, not only research credit claims. That breadth gives Treasury flexibility, but it also means the option raises questions well beyond the research credit.

4.7Option 7: codify the practitioner rule

Congress could give section 10.27, or the 2024 proposal, a statutory basis, so that the restriction on contingent fees for returns and pre-examination refund claims would no longer depend on whether preparing a refund claim counts as practice before the IRS.

What it would do. It would reverse the practical effect of Ridgely for practitioners, who could no longer charge contingent fees for ordinary refund claims.41
What it would not do. If limited to practitioners, it would leave preparers who are not attorneys, certified public accountants or enrolled agents outside the rule, which is the gap the Ridgely court described.4
Trade-offs. It is narrower and simpler than general preparer regulation, and it applies to all tax returns rather than only research credit claims.

4.8Option 8: data and reporting

Congress could require the IRS to publish regular data on research credit claims, examinations and adjustments. The IRS's published corporation research credit tables run only to tax year 2014.24

What it would do. It would allow the debate to rest on evidence, especially if combined with fee disclosure.
What it would not do. It would not change any incentive.

5The option that changes the fee structure for everyone

5.1Option 9: a statutory prohibition for Section 41 engagements

Congress could prohibit any person from charging a contingent fee for preparing, or advising on, a federal research credit claim.

What it would do. Written into the Internal Revenue Code, the rule would apply to every paid preparer, whatever their credentials, and to original returns and refund claims alike. It would not depend on Treasury's authority over practice, which is the limit identified in Loving and Ridgely.34

Design questions. A prohibition would need to settle several points.

Definition. Circular 230's definition already covers a percentage of the refund or taxes saved, any other result based fee, and a promise to refund the fee if a position fails.1 Using it would avoid creating a new term.
Scope of the work. Treasury's 2024 proposal defines preparation to include "providing advice that is directly relevant to determining the existence, character, or amount of an item, entry, or another portion of a tax return or claim for refund".5 A similar definition would cover advisers who calculate the credit without signing the return.
Exceptions. Circular 230 allows contingent fees for representation in examinations, for interest and penalty claims and in litigation.1 Congress would need to decide whether representation during an examination of a research credit claim should remain open to contingent pricing.
Enforcement. Options include a penalty on the preparer measured by the fee received. Treasury's existing power to penalize representatives is capped at the gross income derived from the conduct, which offers a model.2 One design question is whether the taxpayer should also be penalized for its adviser's fee.
Transition. Engagements already signed would need a clear rule, as Treasury provided when it last changed its rule.25

Who would be affected. Some advisers are already bound by a similar rule. The AICPA Code bars members in public practice from preparing an original or amended return or a refund claim for a contingent fee.26 Circular 230 bars practitioners from contingent fees for returns and for refund claims outside the examination window, subject to the Ridgely limit for ordinary refund claims.14 A statutory prohibition would therefore change most for two groups: paid preparers who are not practitioners or AICPA members, and practitioners preparing ordinary refund claims. The IRS states that preparers who hold a preparer tax identification number but no professional credential are authorized to prepare tax returns.27

What it would not do. It would not stop overstated claims prepared on fixed fees, and it would not by itself improve the IRS's data.

Trade-offs. The main cost falls on businesses that value paying nothing upfront. When Treasury last tightened its rule, commenters said restrictions "prohibited some small and middle market taxpayers from appropriately requesting refunds".25 Supporters of a prohibition say that concern can be met by fixed, capped or staged fees that do not depend on the size of the credit. The concern is real, and the prohibition would remove a pricing model some businesses prefer.

5.2Figure 1: the options compared

Option	Reaches every paid preparer	Changes the fee incentive	Needs legislation
1. Leave to Treasury	No5	For practitioners only	No
2. Fee disclosure	Yes, through the taxpayer	No	Penalty would9
3. Identify the credit preparer	Yes	No	Possibly
4. Stronger penalties	Yes	No	Yes9
5. Refund paid to taxpayer only	Yes	No	Possibly
6. General preparer authority	Yes	Only if rules follow	Yes8
7. Codify the practitioner rule	No	For practitioners only	Yes
8. Data and reporting	Not applicable	No	Possibly
9. Statutory prohibition	Yes	Yes	Yes

The options are not exclusive. Several could be combined, and disclosure and data would help measure the effect of any of them.

6The case against acting

The strongest case against legislation is that contingent fees bring the credit to businesses that would not otherwise claim it, that preparer penalties already apply to everyone, and that the IRS's information requirements and Section G reporting give it better tools than before.1115 The 2025 House provision would have gone further and barred Treasury from restricting such fees at all.6

Our position

The answer is that penalties and reporting act after a claim is filed, require proof of fault, and leave the fee unchanged. Treasury considered leaving pre-examination refund claims unregulated in 2024 and said that this "would not have met the objective to discourage unduly aggressive tax positions".5 Professional rules already prohibit contingent fees for returns and refund claims for AICPA members.26 A statutory rule would extend that standard to everyone who prepares a research credit claim.

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. Written into statute, the rule would not depend on how far Treasury's authority over practice before the IRS extends. 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.

7What the record does not show

No official data shows how many research credit claims are prepared on a contingent fee, or how they fare on examination.1524 The effect of any option in this paper therefore cannot be estimated from official sources, and this paper makes no estimate. The congress.gov record and the Federal Register were checked on 11 October 2026; later action could change the picture described here.519

References

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (b), (c) and (d). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.27 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 31 U.S.C. 330, Practice before the Department, subsections (a) and (b), 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
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, 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
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, Regulatory Flexibility Act analysis (page 104924) and proposed section 10.51. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026; Federal Register docket search for REG-116610-20 on that date returned only the proposed rule). Back
US House of Representatives, H.R. 1, 119th Congress, Engrossed in House, section 112208. https://www.govinfo.gov/content/pkg/BILLS-119hr1eh/html/BILLS-119hr1eh.htm (accessed 11 October 2026). Back
Public Law 119-21, 139 Stat. 72, approved 4 July 2025, full text searched for "contingent fee". https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm (accessed 11 October 2026). Back
US House of Representatives, H.R. 1983, Tax Return Preparer Accountability Act of 2025, 119th Congress, introduced 10 March 2025, sections 1 and 2. https://www.congress.gov/119/bills/hr1983/BILLS-119hr1983ih.pdf (accessed 11 October 2026). Back
Department of the Treasury, General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals (March 2024), "Expand and increase penalties for noncompliant return preparation and e-filing and authorize IRS oversight of paid preparers", pages 206 to 209 and summary table. https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 7701, Definitions, subsection (a)(36)(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-chap79-sec7701.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), (b) and (e), 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
Office of the Law Revision Counsel, 26 U.S.C. 7407, Action to enjoin tax return preparers, 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-chap76-subchapA-sec7407.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6695, Other assessable penalties with respect to the preparation of tax returns for other persons, subsection (f), 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-sec6695.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
Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025), read in full, including "Section G". https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Treasury Department and Internal Revenue Service, 26 CFR 1.6109-2, Tax return preparers furnishing identifying numbers for returns or claims for refund and related requirements, paragraphs (a)(1) to (a)(3). https://www.ecfr.gov/current/title-26/section-1.6109-2 (accessed 11 October 2026). Back
Treasury Department and Internal Revenue Service, 26 CFR 301.7701-15, Tax return preparer, paragraphs (b)(1) and (b)(2)(i). https://www.ecfr.gov/current/title-26/section-301.7701-15 (accessed 11 October 2026). Back
Congress.gov, H.R. 1, 119th Congress, actions (passed House 22 May 2025; passed Senate with an amendment 1 July 2025; became Public Law No. 119-21 on 4 July 2025), read through the congress.gov API. https://www.congress.gov/bill/119th-congress/house-bill/1/all-actions (accessed 11 October 2026). Back
Congress.gov, H.R. 1983, 119th Congress, actions (introduced and referred to the Committee on Ways and Means, 10 March 2025; no later action), read through the congress.gov API. https://www.congress.gov/bill/119th-congress/house-bill/1983/all-actions (accessed 11 October 2026). Back
Government of Canada, Income Tax Act, RSC 1985, c 1 (5th Supp), subsections 162(5.1), (5.2) and (5.3). https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-162.html (accessed 11 October 2026). Back
Canada Revenue Agency, Budget 2013, Scientific Research and Experimental Development (SR&ED) Tax Incentive Program, section on claim preparer information and penalty. https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2013/budget-2013-scientific-research-experimental-development-tax-incentive-program.html (accessed 11 October 2026). Back
HM Revenue and Customs, Corporate Intangibles Research and Development Manual, CIRD81805, "R&D tax relief: conditions to be satisfied: restriction of nominations and assignments". https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-and-development-manual/cird81805 (accessed 11 October 2026). Back
HM Revenue and Customs, Approach to Research and Development tax reliefs 2023 to 2024 (published 30 October 2024), section 2.1. https://www.gov.uk/government/publications/hmrcs-approach-to-research-and-development-tax-reliefs-2023-to-2024/approach-to-research-and-development-tax-reliefs-2023-to-2024 (accessed 11 October 2026). Back
Internal Revenue Service, SOI Tax Stats: Corporation research credit, table list. https://www.irs.gov/statistics/soi-tax-stats-corporation-research-credit (accessed 11 October 2026). Back
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
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
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Cite this paper

Summary

1Summary

2The present law

2.1Circular 230

2.2The court decisions

2.3The 2024 proposal

2.4The preparer rules that reach everyone

2.5What the claim shows

3Recent proposals

3.1A House provision restricting Treasury

3.2Treasury's revenue proposals

3.3A bill on preparer regulation

4Options that leave the fee structure in place

4.1Option 1: leave the matter to Treasury

4.2Option 2: disclosure of the fee on the claim

4.3Option 3: identify the person who prepared the credit

4.4Option 4: stronger penalties and shared liability

4.5Option 5: restrict who receives the refund

4.6Option 6: general authority over paid preparers

4.7Option 7: codify the practitioner rule

4.8Option 8: data and reporting

5The option that changes the fee structure for everyone

5.1Option 9: a statutory prohibition for Section 41 engagements

5.2Figure 1: the options compared

6The case against acting

7What the record does not show

References

About this paper

Cite this paper

Summary

1Summary

2The present law

2.1Circular 230

2.2The court decisions

2.3The 2024 proposal

2.4The preparer rules that reach everyone

2.5What the claim shows

3Recent proposals

3.1A House provision restricting Treasury

3.2Treasury's revenue proposals

3.3A bill on preparer regulation

4Options that leave the fee structure in place

4.1Option 1: leave the matter to Treasury

4.2Option 2: disclosure of the fee on the claim

4.3Option 3: identify the person who prepared the credit

4.4Option 4: stronger penalties and shared liability

4.5Option 5: restrict who receives the refund

4.6Option 6: general authority over paid preparers

4.7Option 7: codify the practitioner rule

4.8Option 8: data and reporting

5The option that changes the fee structure for everyone

5.1Option 9: a statutory prohibition for Section 41 engagements

5.2Figure 1: the options compared

6The case against acting

7What the record does not show

References

About this paper

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