Contingent fee

From Wikicpa

Section 10.27 of Circular 230 prohibits a tax preparer from charging a contingent fee on an originally filed return. Regulations proposed in 2006 would precluded the preparer from charging contingent fees on original return, amended returns, and claims for refunds. The IRS feels that restricting contingent fees discourages tax preparers from taking positions that exploit and circumvent the audit selection process.

Contingent fees may still be charged for services rendered in an examination of the an IRS challenge of an original return. A contingent fee for services rendered in connection with the IRS examination or challenge to, an amended return or claim for refund filed prior to the taxpayer receiving notice of the examination or challenge to the original return. A written notice of examination includes the written notice furnished to taxpayers subject to the Coordinated Industry Situation procedures requesting a statement showing additional tax due or an adequate disclosure of an item or position. The purpose of the notice is to avoid the imposition of certain accuracy-related penalties if no other written notice is received. Contingent fees also maybe charged for services rendered in connection with a judicial proceeding arising under the federal tax laws.

Example: A tax preparer reads that the IRS ruled that a vacation was deductible in a recent case. Without reading the case himself and learning the facts were very specific about the vacation being an important part of the taxpayer’s business, he contacts all of his clients who have taken vacation this year. He informs them that he will amend their last three years returns and deduct all their vacation expenses. He plans to only charge for the preparation when the clients receive their refund from IRS. At that time, he expects to invoice for 33% of the refund. This preparer is in violation of Section 10.27 for the contingent fee.

Example: The IRS audited your clients income tax return. The auditor disallowed a questionable deduction. This deduction was allowed by the Tax Court in some districts and disallowed in others. It has never been taken to Tax Court in your clients district. A local CPA and attorney agree to take the situation to Tax Court for a percentage of the taxes saved if the court allows the deduction. In this situation the contingent fee is allowed by Section 10.27.