The case for success fees, examined

1Summary

Some businesses choose to pay a research credit adviser a success fee: a fee calculated as a share of the credit, often payable only if a credit is obtained. This paper sets out the reasons for that choice fairly and in their strongest form before answering them.

The case has five parts. Success fees give access to a complex credit at no upfront cost. They match cost to cash, because the fee is paid from the benefit. They share risk, because the adviser bears the cost of work that finds nothing. They align the adviser with the value the client receives. And they are a choice that informed businesses make freely. Supporters can also point to the official record: federal law accepts contingent fees for several kinds of claims against the government, and both Treasury and the AICPA allow them where a government body will review the matter.12345

The paper answers each argument from the same record. It finds that most of the benefits come from when a fee is paid rather than how it is calculated, that the risk a success fee shares is not the risk that matters most to the taxpayer, and that the precedents for contingent fees involve review before payment, which a self-assessed research credit does not have. Nothing in this paper suggests that advisers who charge success fees act improperly. Swanson Reed, which publishes this paper, has a commercial interest in the question; its position is stated once, in a labeled box.

2Why the case deserves a fair hearing

2.1A common, lawful choice

A success fee is not, in itself, unlawful for every adviser. Treasury's rules restrict contingent fees for practitioners who practice before the IRS, and the AICPA Code restricts them for its members, but in 2014 a federal court held that the IRS cannot apply its rule to ordinary refund claims prepared before an audit, and the AICPA Code binds only its members.456 Advisers who are neither Circular 230 practitioners nor AICPA members are subject to neither restriction.

Businesses that agree to success fees include businesses that understand them. Any argument for changing the law has to explain why it should override a choice made by both parties to a contract. That burden is heavier for a publisher with a commercial interest in the answer, and readers are entitled to weigh this paper with that interest in mind.

2.2Where the arguments have been made

The arguments are not hypothetical. When Treasury last revised its contingent fee rule in 2007, it recorded that most commenters opposed further limits. Several said the proposed rules "were overly broad, improperly interfered with the practitioner-client relationship, and prohibited some small and middle market taxpayers from appropriately requesting refunds".7 Another group asked that contingent fees be allowed "in situations in which IRS review of the taxpayer's position is probable and the fees do not provide an incentive for abuse".7

Similar arguments have been made in other claims markets. When the UK's Financial Conduct Authority capped the fees of claims management firms in 2021, respondents argued that customers paying on a no win no fee basis "can never be out-of-pocket", and that the firms provide "access to justice, particularly for vulnerable consumers".8 When Canada consulted on a cap for disability tax credit fees, it recorded that some participants "felt current rates are appropriate and the market would regulate itself".9 Those markets differ from the research credit, and they are cited here only as places where the same arguments were made in public.

3The case in its strongest form

3.1Access

The research credit is hard to claim. IRS Chief Counsel has described it as "a complex area of law involving the application of a four-part test, numerous exclusions, and significant computation and calculation elements to each research activity claimed".10 The test is applied separately to each business component, and the claim must rest on records that substantiate each expense.1112

Many businesses that do qualifying work may not know it, or may not have the staff to find out. A success fee lets them test the question at no cost. If there is no credit, they pay nothing. Supporters argue that, without that offer, some businesses would never claim a credit that Congress intended them to have, and that the businesses least able to pay an upfront fee are the ones most likely to go without.

Congress itself has accepted this reasoning in other settings. It allows contingent fees for Social Security disability and retirement claims, paid directly from past-due benefits.1 It allows them for veterans' benefits claims after the initial decision.2 It allows them for claims under the Federal Tort Claims Act.3 In each case the purpose is access: a claimant who cannot pay a lawyer upfront can still be represented. The UK regulator, while capping fees, said it wanted claims firms to remain available because they help raise "awareness of the opportunity to claim".8

3.2Cash flow

The credit produces cash only after a return or claim is filed and processed. For refund claims, the IRS says it will try to make determinations within six months of receipt.13 A business that is short of cash may be unable to pay a professional fee months before any benefit arrives. A success fee, paid from the credit once it is received, matches the cost to the benefit. Supporters say this is simply sound financing for a business that has no spare cash.

Under a fixed fee, a business that pays for a study and learns that it has no credit, or a small one, has paid for nothing it can use. Under a success fee, the adviser bears that cost. The business pays only when there is something to pay from. Supporters argue that this places the risk with the party best able to judge it in advance: the adviser, who has seen many claims and can decide whether an engagement is worth taking.

3.4Alignment and value

A fee that rises with the credit gives the adviser a reason to find every qualifying activity and expense. Supporters argue that this protects the business from an adviser who does the minimum for a fixed price. They also argue that a percentage fee prices the work by the value it delivers, which is how many professional services are priced. The AICPA Code itself recognizes that a member's fees "may vary depending, for example, on the complexity of services rendered".5

3.5Review makes the incentive safe

The strongest form of the case draws on the rules themselves. Treasury's rule allows contingent fees for services connected with an IRS examination of a return, for claims that relate only to statutory interest or penalties, and for judicial proceedings.4 Treasury explained in 2007 that it allowed contingent fees for interest and penalty reviews "because there is no exploitation of the audit lottery in these situations".7 The AICPA Code goes further. It treats a fee as not contingent if the member can show a reasonable expectation that a government agency will give the matter substantive consideration, and gives as examples a revenue agent's examination and an amended return claiming a refund above the threshold for review by the Joint Committee on Taxation.5

Supporters argue that research credit refund claims are now reviewed. Since 2022 the IRS has required every research credit refund claim to identify each business component, the research activities performed for each, and the totals of qualified wage, supply and contract research expenses, and it reviews each claim for those items.13 Form 6765 now asks for business component information as well, and that section becomes required for most filers for tax years beginning after 2025.14 On this view, the conditions under which Treasury and the AICPA already tolerate contingent fees are increasingly present.

3.6Existing safeguards and freedom of contract

Finally, supporters point to the penalties that already apply. A preparer whose return or claim understates tax because of an unreasonable position owes the greater of $1,000 or 50 percent of its income from the return or claim.15 The government can seek an injunction against a preparer who engages in conduct subject to that penalty or who guarantees the allowance of a tax credit.16 The taxpayer, too, faces a 20 percent penalty on an excessive refund claim, which gives it a reason to check its adviser's work.17 With those safeguards in place, supporters argue, a ban would remove a pricing choice that businesses value without adding much protection.

These are serious arguments, and they describe real benefits to real businesses. Advisers who charge success fees can apply the law carefully and decline weak positions. The question is not whether those advisers act in good faith but whether the fee structure is the right one for this credit.

4Our answer (Swanson Reed's position)

This section is Swanson Reed's view.

4.1Access is about upfront cost, not percentages

The access argument is strongest for small businesses, and its core is that they cannot pay before they know whether a credit exists. That is an argument for low upfront cost. It is not, by itself, an argument for calculating the fee as a share of the credit.

Other structures can provide low upfront cost. A short scoping stage at a modest fixed price can tell a business whether a claim is worth preparing before it commits to the main fee. A fixed fee can be paid in stages. These are described in the companion paper Alternative fee models. Treasury's definition of a contingent fee turns on how a fee is calculated: whether it is based on whether a position is sustained, or on a percentage of the refund or taxes saved.4 A fixed fee does not become contingent because it is paid later, so long as the amount does not depend on the result. A fee payable only if a credit is obtained does depend on the result, and would fall within the definition.4

The federal precedents for contingent fees help less than they first appear. In Social Security and veterans' claims, the agency decides the amount of past-due benefits, and the fee is calculated on that amount and paid from it.12 In tort claims, a court or agency fixes the judgment or settlement.3 The representative argues for a result, but a public body decides it. In a research credit claim on a return, the amount claimed is the amount the taxpayer and its adviser calculate. And Congress went further for veterans: no fee may be charged for help with the initial claim at all.2 The precedents show that Congress has accepted contingent fees where a public body fixes the amount first, and has limited them even there.

4.2Cash flow is about timing

The cash flow argument is about when the fee is paid. A fixed fee can be timed to the filing of the return or to the receipt of the refund, provided its amount does not depend on the outcome. For a qualified small business, Section 41(h) also allows an election to apply part of the credit against payroll taxes, up to $500,000 a year for taxable years beginning after 2022, so that an eligible business can use part of the credit against payroll taxes rather than waiting for an income tax liability.11 A qualified small business for this purpose has gross receipts of less than $5 million for the year and no gross receipts before the five-year period ending with that year, and may make the election for no more than five years.11

4.3The risk a success fee shares is the wrong risk

A success fee shares one risk: that the work finds no credit, or a small one. It does not share the risk that matters most to the business, which is that a credit it has claimed does not survive examination.

If a claim is reduced, the taxpayer repays the credit. Interest runs from the date the tax was due.18 If a claim for refund or credit is made for an excessive amount, the person making the claim owes a penalty of 20 percent of the excess unless the excess is due to reasonable cause.17 An accuracy-related penalty of 20 percent can apply to an underpayment caused by negligence or a substantial understatement.19 The IRS tells taxpayers that although the preparer signs the return, "you're ultimately accountable for the accuracy of every item reported on your return".20

The preparer's own penalty is paid to the government, not to the client.15 Whether a success fee is refunded when a claim is reduced depends on the contract. And under Treasury's definition, an arrangement to refund the fee if a position is challenged or not sustained is itself a contingent fee.4 So the version of the success fee that would share examination risk is restricted by the same rule for the same reason.

4.4Alignment with what is claimed is not alignment with what is kept

A fee calculated on the credit claimed is aligned with the amount claimed. The business keeps only the amount that survives examination. Between those two amounts, the interests of the adviser and the business can differ. The IRS told its examiners in 2008 that "If the fee is based on the ultimate determination of the claim amount there may be a limitation on to ability of the taxpayer to resolve the issue", and that "Some fee agreements shift ultimate control over the resolution of the claim to the preparer."21 That guide states that it is not an official pronouncement of IRS position, and it is cited only as a record of what examiners were told.21

Treasury has described the same concern in general terms. In December 2024 it said that "A practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits."22 That is a statement about incentives, not about any adviser. It is the reason the alignment argument cuts both ways: the same feature that gives an adviser a reason to find every qualifying expense gives it a reason to resolve every close judgment in favor of a larger claim.

As for the AICPA's recognition that fees may vary with complexity, it supports pricing by the work.5 A fee that rises with the difficulty of the engagement is a different thing from a fee that rises with the size of the result.

4.5Review: the strongest argument, and its limit

The review argument is the most persuasive part of the case, because it rests on the rules themselves. Treasury and the AICPA both distinguish between contingent fees for work that a government body will review and contingent fees for preparing returns and claims.45 The distinction is principled. Where a public body decides the outcome, the adviser's incentive to enlarge the claim meets an independent check.

The limit is that a research credit claimed on a return is not reviewed in that sense. The IRS's information requirements make refund claims more transparent, and the IRS checks each refund claim for the required items, but it examines the underlying research only if the claim is selected for examination.13 The specificity requirement applies to refund claims; it does not apply to a credit claimed on a timely original return.13 The AICPA draws the line in the same place: an expectation of substantive review "is not reasonable if the member prepares a client's original tax returns".5 Treasury's 2007 reasoning drew it there too, when it said restricting contingent fees for preparing returns discourages "return positions that exploit the audit selection process".7 The review argument supports contingent fees for representation in an examination, which Treasury already allows.4 It does not support them for preparing the claim.

4.6Safeguards after the fact

The preparer penalty applies only when a position is found unreasonable and the IRS pursues it, and it is measured partly by the preparer's income from the return or claim.15 It does not address how that income is calculated. Injunctions require a court action.16 Both depend on the IRS detecting the problem first. The taxpayer's own penalty gives it a reason to check the work, but the IRS's guidance to taxpayers is that they should avoid preparers "who base their fees on a percentage of the refund".20

4.7Freedom of contract

The rules already restrict this choice for many advisers: practitioners under Circular 230 and members bound by the AICPA Code,45 although under the 2014 Ridgely v. Lew decision the IRS cannot apply its rule to ordinary refund claims filed before an audit.6 The courts held in 2014 that Treasury's practice authority does not reach return preparation or ordinary refund claims, and said that wider regulation of preparers is "a decision for Congress and the President to make if they wish by enacting new legislation".236 The question for Congress is therefore whether a restriction that Treasury and the AICPA already place on practitioners and members for original returns should apply evenly to everyone who prepares research credit claims. A prohibition on contingent fees would leave every other pricing model available.

5Where the case remains strongest

A fair examination should say where the answers are incomplete.

First, the access argument may hold for some very small claims, where the cost of even a scoped fixed fee is large relative to the possible credit. No official data shows how many such businesses exist, or how many would stop claiming if success fees were not available. No IRS form records how a claim's preparer was paid, so the question cannot be measured from official data.14

Second, nothing in the record shows that claims prepared on success fees are adjusted more often, or by more, than other claims. The case against success fees in this paper rests on the structure of the fee, the law that governs the claim and the stated reasoning of Treasury and the IRS, not on measured outcomes.

Third, some of the benefits that supporters describe are real benefits of the adviser's skill and diligence rather than of the fee structure. A business that receives a well-prepared claim under a success fee has been well served. The argument here is about which structure best protects the taxpayer when the claim is not well prepared.

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. A prohibition would leave fixed, hourly, staged and scoped fees available, and would leave untouched the contingent fees Treasury already permits for representation in examinations and litigation.

6What the evidence does and does not show

What the record shows:

Arguments for contingent fees based on access, cost and the practitioner and client relationship were put to Treasury in 2007, and Treasury maintained its restriction on contingent fees for returns and refund claims.7
Federal law accepts contingent fees in several claims against the government, in each case where a public body fixes the amount, and with limits.123
Treasury and the AICPA permit contingent fees where a government body will review the matter, and not for preparing original returns.45
The financial consequences of a reduced research credit fall on the taxpayer.17191820

What the record does not show:

How many research credit claims are prepared on success fees.
Whether such claims fare better or worse on examination than other claims.
How many businesses would stop claiming if success fees were prohibited.

Readers who support success fees can test the argument against those gaps. So can readers who agree with the position above.

References

Office of the Law Revision Counsel, 42 U.S.C. 406, Representation of claimants before Commissioner, subsections (a)(2)(A) and (a)(4), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title42/html/USCODE-2024-title42-chap7-subchapII-sec406.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 38 U.S.C. 5904, Recognition of agents and attorneys generally, subsections (c)(1) and (d)(1) and (2), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title38/html/USCODE-2024-title38-partIV-chap59-sec5904.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 28 U.S.C. 2678, Attorney fees; penalty, United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title28/html/USCODE-2024-title28-partVI-chap171-sec2678.htm (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
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 1.510.001 Contingent Fees Rule, paragraphs .01, .03 and .04, and ET 1.510.010 Tax Matters, paragraphs .02 to .04. 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
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
Financial Conduct Authority, PS21/18: Restricting CMC charges for financial products and services claims, Policy Statement (November 2021), paragraphs 1.12, 2.16, 2.18 and 2.19. https://www.fca.org.uk/publication/policy/ps21-18.pdf (accessed 11 October 2026). Back
Government of Canada, Disability Tax Credit Promoters Restrictions Regulations: SOR/2021-55, Regulatory Impact Analysis Statement, Canada Gazette, Part II, Volume 155, Number 8 (14 April 2021), section "Consultation". https://gazette.gc.ca/rp-pr/p2/2021/2021-04-14/html/sor-dors55-eng.html (accessed 11 October 2026). Back
IRS Office of Chief Counsel, Memorandum 20214101F, I.R.C. 41 Research Credit Refund Claims, released 15 October 2021, Law and Analysis part C. https://www.irs.gov/pub/irs-lafa/20214101f.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, subsections (a), (d)(1) and (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
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
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction and questions 3, 4 and 5 (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), Section G, "For tax years beginning after 2025" and "Requirements To Complete Section G"; the instructions do not ask how a claim preparer was paid. https://www.irs.gov/instructions/i6765 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6694, Understatement of taxpayer's liability by tax return preparer, 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-sec6694.htm (accessed 11 October 2026). Back
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Cite this paper

Summary

1Summary

2Why the case deserves a fair hearing

2.1A common, lawful choice

2.2Where the arguments have been made

3The case in its strongest form

3.1Access

3.2Cash flow

3.4Alignment and value

3.5Review makes the incentive safe

3.6Existing safeguards and freedom of contract

4Our answer (Swanson Reed's position)

4.1Access is about upfront cost, not percentages

4.2Cash flow is about timing

4.3The risk a success fee shares is the wrong risk

4.4Alignment with what is claimed is not alignment with what is kept

4.5Review: the strongest argument, and its limit

4.6Safeguards after the fact

4.7Freedom of contract

5Where the case remains strongest

6What the evidence does and does not show

References

About this paper

Cite this paper

Summary

1Summary

2Why the case deserves a fair hearing

2.1A common, lawful choice

2.2Where the arguments have been made

3The case in its strongest form

3.1Access

3.2Cash flow

3.3Risk sharing

3.4Alignment and value

3.5Review makes the incentive safe

3.6Existing safeguards and freedom of contract

4Our answer (Swanson Reed's position)

4.1Access is about upfront cost, not percentages

4.2Cash flow is about timing

4.3The risk a success fee shares is the wrong risk

4.4Alignment with what is claimed is not alignment with what is kept

4.5Review: the strongest argument, and its limit

4.6Safeguards after the fact

4.7Freedom of contract

5Where the case remains strongest

6What the evidence does and does not show

References

About this paper

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