The rules on contingent fees in US tax practice

1Summary

Two sets of rules restrict how people who prepare federal tax returns and refund claims may be paid. The first is Circular 230, Treasury's regulations governing practice before the IRS, whose section 10.27 generally prohibits practitioners from charging contingent fees.1 The second is the AICPA Code of Professional Conduct, whose Contingent Fees Rule bars members in public practice from preparing an original or amended return or a refund claim for a contingent fee.2

Both rules matter for the federal research credit under Section 41, because a credit claimed on a return or refund claim produces a specific dollar amount, and a fee calculated as a percentage of that amount falls within both definitions.12

Neither rule reaches everyone. In 2014 the D.C. Circuit held in Loving v. IRS that Treasury's statutory authority does not extend to regulating tax return preparers.3 Later that year, in Ridgely v. Lew, a district court held that the IRS lacks authority to regulate the preparation and filing of refund claims made before an audit, and enjoined enforcement of section 10.27 in that respect.4 In December 2024 Treasury and the IRS proposed a new approach that would still reach only practitioners, and it had not been finalized when this paper was written.5 The AICPA Code binds only AICPA members.2

This paper sets out each rule, the court decisions, the 2024 proposal and the gaps between them.

2Why the rules matter for research credit claims

The Internal Revenue Code defines a tax return preparer as any person who prepares for compensation, or employs others to prepare for compensation, any return of tax or any claim for refund, including a substantial portion of one.6 A person who prepares a research credit computation for a fee will usually fall within that definition. Anyone who prepares or assists in preparing federal tax returns for compensation must have a preparer tax identification number.7

Research credits are claimed on original returns and, often, on amended returns or other claims for refund. 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.8 Both routes are covered by the professional rules on their face.12 The difference between them, as this paper explains, lies in which rules can actually be applied, and to whom.

3Circular 230 section 10.27

3.1The statutory basis

Circular 230 is issued under 31 U.S.C. 330. That statute allows the Secretary of the Treasury to "regulate the practice of representatives of persons before the Department of the Treasury", and to suspend, disbar or censure a representative who is incompetent, is disreputable, violates the regulations, or misleads or threatens a client with intent to defraud.9 The scope of the words "representatives" and "practice" proved decisive in the cases discussed below.

3.2The rule's history

A 2014 federal court opinion records that, beginning in 1994, Circular 230 prohibited contingent fees for preparing original income tax returns, but allowed them for amended returns and refund claims.4 In 2007 Treasury and the IRS adopted the present rule, which extended the prohibition to amended returns and refund claims and applies to fee arrangements entered into after 26 March 2008.110

The 2007 preamble explains why. Most commenters had opposed further limits. Several said the proposed rules were overly broad, improperly interfered with the relationship between practitioner and client, and prevented some small and middle market taxpayers from requesting refunds.10 Treasury and the IRS adopted the rule with modifications, saying that "a rule restricting contingent fees for preparing tax returns supports voluntary compliance with the Federal tax laws by discouraging return positions that exploit the audit selection process", and that they were particularly concerned with contingent fees for refund claims or amended returns filed late in the examination process.10 They permitted contingent fees for interest and penalty reviews because "there is no exploitation of the audit lottery in these situations".10

Treasury later described two further steps. Notice 2008-43 clarified the examination exception, and also allowed contingent fees for whistleblower claims under section 7623.5 In 2009 Treasury proposed further changes to the contingent fee rules, which were never finalized and were withdrawn in December 2024.5

3.3The text today

The current text has four parts.1

Part	What it says
General rule, paragraph (b)(1)	Except as listed, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS
Exception, paragraph (b)(2)	Services in connection with the IRS's examination of, or challenge to, an original return, or an amended return or refund claim filed within 120 days of the taxpayer receiving written notice of the examination of, or a written challenge to, the original return
Exception, paragraph (b)(3)	Services in connection with a refund claim filed solely in connection with the determination of statutory interest or penalties
Exception, paragraph (b)(4)	Services in connection with any judicial proceeding arising under the Internal Revenue Code

Figure 1. The structure of Circular 230 section 10.27. Source: 31 CFR 10.27.1

A contingent fee is any fee based, in whole or in part, on whether a position taken on a return or other filing avoids challenge by the IRS or is sustained by the IRS or in litigation.1 It includes a fee "based on a percentage of the refund reported on a return", a fee based on a percentage of the taxes saved, and a fee that otherwise depends on the specific result attained.1 It also includes an arrangement to reimburse all or part of the client's fee if a position is challenged or not sustained, whether through an indemnity agreement, a guarantee, rescission rights or any similar arrangement.1

A matter before the IRS includes tax planning and advice, "preparing or filing or assisting in preparing or filing returns or claims for refund or credit", and all matters connected with a presentation to the IRS.1 Circular 230 also provides that a tax return includes an amended return and a claim for refund.11

Section 10.27 separately provides that a practitioner may not charge an unconscionable fee in connection with any matter before the IRS.1

3.4Who it covers

Section 10.27 applies to practitioners. A practitioner is an individual described in section 10.3: an attorney, certified public accountant, enrolled agent, enrolled actuary, enrolled retirement plan agent or registered tax return preparer.1112 Section 10.8, added in 2011, provides on its face that individuals who for compensation prepare all or a substantial portion of a document pertaining to a taxpayer's liability are subject to the duties and restrictions in subpart B, which includes section 10.27.13 As the next section explains, the courts have since limited Treasury's authority over return preparation, and the 2024 proposal would remove the current text of section 10.8.5

4Loving v. IRS

In 2011 Treasury and the IRS issued regulations requiring paid tax return preparers to pass an initial certification exam, pay annual fees and complete at least 15 hours of continuing education each year.3 Three independent tax return preparers challenged them.

On 11 February 2014 the D.C. Circuit affirmed the district court's judgment against the IRS. It held that the IRS's authority under 31 U.S.C. 330 "cannot be stretched so broadly as to encompass authority to regulate tax-return preparers".3 The court noted that, in the first 125 years after the statute was enacted in 1884, the Executive Branch never interpreted it to authorize regulation of tax return preparers.3 It added: "It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation."3

Treasury has since summarized the case: the courts concluded that preparing and filing returns falls short of presenting a case, and so is not practice before the IRS, and the D.C. Circuit explained that while tax return preparers assist taxpayers, "they do not represent taxpayers before the IRS or formally act as their agent".5

5Ridgely v. Lew

5.1The question

Ridgely v. Lew applied the same reasoning to contingent fees. A practicing certified public accountant argued that the IRS had exceeded its authority by regulating the fees charged for "Ordinary Refund Claims", which the court defined as "refund claims that practitioners file after a taxpayer has filed his original tax return but before the IRS has initiated an audit of the return".4 He said the rule had cost him clients and significant revenue.4

5.2The decision

On 16 July 2014 the District Court for the District of Columbia granted summary judgment to the plaintiff. It treated Loving as controlling on what "representative" and "practice" mean.4 A person preparing and filing a refund claim before holding any power of attorney has no legal authority to act for the taxpayer and so is not a "representative"; the process of filing such a claim is not "practice".4

The court also relied on the structure of the Internal Revenue Code. It observed that Congress had enacted "a comprehensive scheme of penalties to curb the potential for abuse in the preparation and filing of both original returns and refund claims", citing among others sections 6662, 6676, 6694 and 6701.4

The court noted a consequence of the IRS's reading: the IRS "would impose no contingent fee restrictions on the preparation and filing of Ordinary Refund Claims by non-CPAs and those who never 'practice' before the IRS".4 It concluded that "the IRS lacks statutory authority to regulate the preparation and filing of Ordinary Refund Claims", and granted a permanent injunction against enforcement of section 10.27 in that respect.4

5.3What it did not decide

The opinion concerned refund claims prepared and filed before an audit. In a footnote, the court said the parties had not raised, and it expressed no view on, the IRS's authority to issue and enforce standards of practice under other subsections of the statute.4 Treasury has since said that the court "did not otherwise address the propriety of contingent fees".5

The eCFR text of section 10.27 still contains the general prohibition and its exceptions as adopted in 2007.1

6The change in how courts read agency authority

Both Loving and Ridgely were decided under the two-step framework from Chevron, under which courts deferred to reasonable agency interpretations of ambiguous statutes. Both courts held that the IRS's reading failed at the first step, because the statute was clear.34 In June 2024 the Supreme Court overruled Chevron in Loper Bright Enterprises v. Raimondo, holding that courts "must exercise their independent judgment in deciding whether an agency has acted within its statutory authority".14 The Court also said that the holdings of earlier cases that relied on Chevron remain subject to statutory stare decisis.14

7The 2024 proposal

On 26 December 2024 Treasury and the IRS published a notice of proposed rulemaking to revise Circular 230.5 On contingent fees, it would remove the current section 10.27 and add a new section 10.51, under which "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 is disreputable conduct".5 The proposed definition of a contingent fee follows the current one, and the proposal defines preparation to include advice directly relevant to determining the existence, character or amount of an entry on a return or claim.5

The notice gave its reasons. These arrangements, it said, "encourage evasion or abuse of Federal tax laws by incentivizing practitioners to take unduly aggressive tax positions for their clients", and "A practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits."5 It noted that the AICPA Code prohibits CPAs from charging contingent fees for these services, and that many state accountancy board rules also prohibit them.5

The proposal relies on 31 U.S.C. 330(c), which allows Treasury to sanction practitioners who engage in disreputable conduct "whether or not the conduct constitutes representation of a client".59 Unlike the current rule, it would not depend on return preparation being practice before the IRS.5 The notice also said Treasury could have followed the case law and not regulated contingent fees for original or amended returns and ordinary refund claims, but that this "would not have met the objective to discourage unduly aggressive tax positions".5

Comments closed on 24 February 2025, and the Federal Register page records that 709 comments were received at Regulations.gov.5 A search of the Federal Register on 11 October 2026 found no final rule.5 Because the sanctions in 31 U.S.C. 330 apply to representatives who practice before Treasury, the proposal, if adopted, would reach practitioners and not preparers who hold no credential.95

8The AICPA Code

8.1The rule

The AICPA Code of Professional Conduct provides that 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".2 It defines a contingent fee as a fee established under an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee otherwise depends on the finding or result.2 Solely for the rule, fees are not contingent if fixed by courts or other public authorities or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies.2

8.2The interpretation for tax matters

The Tax Matters interpretation explains that preparing a return or refund claim includes giving advice on past events that is directly relevant to determining the existence, character or amount of an entry on a return or claim.15 A fee counts as determined by the findings of a governmental agency only if the member can show a reasonable expectation, when the fee is agreed, that a government agency will give the matter substantive consideration. That expectation is not reasonable where the member prepares the client's original return.15

The interpretation lists examples where a contingent fee is permitted. They include representing a client in a revenue agent's examination, and filing an amended return or refund claim for an amount greater than the threshold for review by the Joint Committee on Taxation.15 That threshold is set by section 6405 of the Code at $2,000,000, or $5,000,000 for a C corporation.16 As an example of a fee that is not permitted, the interpretation gives an amended return claiming a refund because a valid deduction was inadvertently omitted from the original.15 It reminds members that when practicing before the IRS they should also comply with other applicable and more restrictive requirements.15

8.3Who it covers

The Code binds AICPA members. In its preface, member includes members, associate members, affiliate members and international associates of the AICPA.17 It does not bind a preparer who is not a member.

9The gaps

Taken together, the rules leave several gaps for research credit claims. Figure 2 summarizes them. It describes the rules in general terms and is not advice on any particular case.

Who prepares the claim	Circular 230 section 10.27	AICPA Contingent Fees Rule
A practitioner who is an AICPA member	Applies on its face to original returns and claims; cannot be enforced against ordinary refund claims after Ridgely14	Applies, subject to the substantive consideration exception215
A practitioner who is not an AICPA member	As above14	Does not apply17
A preparer with no professional credential	Outside Treasury's practice authority under Loving3	Does not apply unless a member17

Figure 2. Which contingent fee rule applies to a research credit claim, by preparer. Sources as cited.

9.1Gap 1: preparers outside both rules

The IRS describes a class of paid preparers who hold a preparer tax identification number but no professional credential and do not take part in the Annual Filing Season Program. They are authorized to prepare tax returns and have no authority to represent clients before the IRS, apart from certain older returns.718 Neither contingent fee rule reaches them.317

9.2Gap 2: ordinary refund claims

A research credit that was missed on the original return is usually claimed on an amended return or refund claim before any audit. Since Ridgely, section 10.27 cannot be enforced against the preparation and filing of those claims on the basis of Treasury's practice authority.45 The AICPA rule still applies to members, but its exception for matters given substantive consideration by a government agency allows contingent fees for refund claims above the Joint Committee threshold.1516

9.3Gap 3: original returns

The text of section 10.27 still covers the preparation of original returns.1 The courts' reasoning in Loving was that preparing returns is not practice before the IRS.3 Treasury's 2024 notice stated that it could have "implemented case law to preclude regulating contingent fee arrangements for preparing original or amended returns and ordinary refund claims", which suggests that Treasury reads the case law as reaching original returns as well.5

9.4Gap 4: disclosure

Neither rule requires a claim to state how its preparer was paid, and Form 6765, the research credit form, does not ask.19 There is no official data on how many research credit claims are prepared on a contingent fee.

9.5What does apply to everyone

The Internal Revenue Code's preparer penalties apply to any tax return preparer, whatever the preparer's credential. A preparer whose return or claim understates liability because of an unreasonable position owes the greater of $1,000 or 50 percent of the income derived from it, and the greater of $5,000 or 75 percent for willful or reckless conduct.206 These penalties apply after the fact. They do not govern how fees are calculated.

10Arguments for leaving the rules as they are

A fair account must consider the case for the present position.

The commenters' case. When Treasury tightened the rule in 2007, most commenters opposed it. They said the rules were overly broad, interfered with the relationship between practitioner and client, and prevented some small and middle market taxpayers from claiming refunds.10 Contingent fees let a business pursue a refund without paying in advance, and they put the cost of unsuccessful work on the adviser.

Professional self-regulation. Professional bodies already restrict contingent fees for their members, and the AICPA rule is drawn to allow them where an agency will give the matter real consideration.15 On this view, the profession is better placed than legislation to draw these lines.

Penalties already deter abuse. The Ridgely court pointed to the Code's penalty scheme as Congress's chosen response to abuse in the preparation of returns and refund claims.4 On this view, a further fee rule adds little.

These arguments deserve weight. The answer is that each depends on coverage the current rules do not have. Professional rules bind only their members and practitioners.23 Penalties apply only after an understatement is found, and the taxpayer bears the first consequences of an overstated claim.20 The commenters' concerns about access and cash flow can be met by fixed, capped or staged fees that are not calculated as a share of the result, which Treasury's definition does not restrict.1 And Treasury's own reasoning, in 2007 and again in 2024, is that the incentive itself is the concern.105

Our position

Congress should prohibit contingent fees, commonly called success fees, in federal research and development tax credit engagements under Section 41, so that the same rule applies to every adviser paid to prepare or support a claim and 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.

11Conclusion

The rules on contingent fees in US tax practice share a concern and differ in reach. Treasury and the AICPA both treat a fee calculated as a share of a refund or tax saving as a contingent fee and restrict it for return and refund claim preparation.12 Treasury's rule rests on authority that the courts have held does not reach return preparers or ordinary refund claims.34 Treasury's 2024 response would still reach only practitioners and is not final.5 The AICPA rule reaches only members and allows contingent fees for larger refund claims.1516 For research credit claims, the result is that whether a contingent fee is restricted depends on who prepares the claim, when, and for how much.

References

Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (a) to (d) (eCFR text adopted by T.D. 9359, 72 FR 54548, 26 September 2007). 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 and .03. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (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 to 5, 7 to 9, 11, 13 and 14 to 15, and footnote 3. 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), Dates, Background parts A and B, Explanation of Provisions parts A and B, Regulatory Flexibility Act analysis and proposed section 10.51; Federal Register document page, public comments panel. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026; Federal Register search on that date showed no final rule). 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
Internal Revenue Service, PTIN requirements for tax return preparers (page last reviewed or updated 16 October 2025). https://www.irs.gov/tax-professionals/ptin-requirements-for-tax-return-preparers (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
Office of the Law Revision Counsel, 31 U.S.C. 330, Practice before the Department, subsections (a) and (c), 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
Treasury Department and Internal Revenue Service, Regulations Governing Practice Before the Internal Revenue Service, final regulations, T.D. 9359, 72 FR 54540 (26 September 2007), preamble, "Contingent Fees", pages 54541 to 54542. https://www.federalregister.gov/documents/2007/09/26/E7-18918/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.2, Definitions, paragraphs (a)(4), (a)(5) and (a)(6). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.2 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.3, Who may practice, paragraphs (a) to (f). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.3 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.8, Return preparation and application of rules to other individuals, paragraphs (a), (c) and (d) (T.D. 9527, 76 FR 32306, 3 June 2011). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-A/section-10.8 (accessed 11 October 2026). Back
Supreme Court of the United States, Loper Bright Enterprises v. Raimondo, No. 22-451, decided 28 June 2024, 603 U.S. ___ (2024), opinion of the Court, slip opinion pages 34 to 35. https://www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 1.510.010 Tax Matters, paragraphs .01 to .05. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6405, Reports of refunds and credits, 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-chap65-subchapB-sec6405.htm (accessed 11 October 2026). Back
American Institute of CPAs, AICPA Code of Professional Conduct (updated for all official releases through September 2026), ET 0.200.020, Application of the AICPA Code, paragraph .02. https://pub.aicpa.org/codeofconduct/ethicsresources/et-cod.pdf (accessed 11 October 2026). 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, Instructions for Form 6765 (Rev. December 2025), Sections E, F and G. 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, 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

Cite this paper

Summary

1Summary

2Why the rules matter for research credit claims

3Circular 230 section 10.27

3.1The statutory basis

3.2The rule's history

3.3The text today

3.4Who it covers

4Loving v. IRS

5Ridgely v. Lew

5.1The question

5.2The decision

5.3What it did not decide

6The change in how courts read agency authority

7The 2024 proposal

8The AICPA Code

8.1The rule

8.2The interpretation for tax matters

8.3Who it covers

9The gaps

9.1Gap 1: preparers outside both rules

9.2Gap 2: ordinary refund claims

9.3Gap 3: original returns

9.4Gap 4: disclosure

9.5What does apply to everyone

10Arguments for leaving the rules as they are

11Conclusion

References

About this paper

Cite this paper

Summary

1Summary

2Why the rules matter for research credit claims

3Circular 230 section 10.27

3.1The statutory basis

3.2The rule's history

3.3The text today

3.4Who it covers

4Loving v. IRS

5Ridgely v. Lew

5.1The question

5.2The decision

5.3What it did not decide

6The change in how courts read agency authority

7The 2024 proposal

8The AICPA Code

8.1The rule

8.2The interpretation for tax matters

8.3Who it covers

9The gaps

9.1Gap 1: preparers outside both rules

9.2Gap 2: ordinary refund claims

9.3Gap 3: original returns

9.4Gap 4: disclosure

9.5What does apply to everyone

10Arguments for leaving the rules as they are

11Conclusion

References

About this paper

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