Key Takeaways
- Contingent fees prohibited for preparing original or amended returns.
- Contingent fees allowed for audit representation and certain refund claims.
- Unconscionable fees are prohibited.
- Fee based on percentage of refund is generally prohibited.
- Contingent fees for returns = disreputable conduct.
- 120-day exception for amended returns after audit notice.
Fee Requirements (Section 10.27)
Why This Matters for the Exam
Fee rules are heavily tested because they're clear-cut: contingent fees are prohibited for returns but allowed for audit representation. The exam tests whether you know the rule and its exceptions.
Expect at least 3-4 questions on contingent fees.
What Is a Contingent Fee?
A contingent fee is any fee that depends on:
- Whether a position taken on a return avoids IRS challenge, or
- Whether a position is sustained (upheld by IRS or court), or
- The amount of tax savings achieved.
Common Example: "I'll prepare your return for $500, plus 10% of any refund over $5,000." This is a contingent fee.
The General Rule: Contingent Fees Prohibited for Returns
| Activity | Contingent Fee Allowed? |
|---|---|
| Preparing original tax returns | ❌ No |
| Preparing amended returns | ❌ No |
| Preparing claims for refund | ❌ No (with exceptions) |
Exceptions: When Contingent Fees ARE Allowed
| Activity | Contingent Fee Allowed? |
|---|---|
| IRS examination of an original return | ✅ Yes |
| Amended return filed within 120 days of audit notice | ✅ Yes |
| Claims for statutory interest or penalties only | ✅ Yes |
| Any judicial proceeding (Tax Court, District Court, etc.) | ✅ Yes |
| Any appeal to the IRS Office of Appeals | ✅ Yes |
The 120-Day Exception
If the IRS initiates an examination (audit), you can charge a contingent fee for an amended return filed within 120 days of receiving the audit notice.
Rationale: At that point, the return is essentially being prepared as part of the audit representation, not as a routine filing.
Unconscionable Fees
Unconscionable fees are fees that are grossly excessive under the circumstances. They are prohibited regardless of whether they are contingent.
Factors in Determining Unconscionability:
- Time and labor required.
- Novelty and difficulty of issues.
- Skill required.
- Customary fees for similar services.
- Results obtained.
- Practitioner's experience and reputation.
Contingent Fees = Disreputable Conduct
Charging contingent fees for original or amended returns is now classified as disreputable conduct under Section 10.51.
| Violation | Consequence |
|---|---|
| Contingent fee for original return | OPR investigation, possible sanctions |
| "Refund percentage" fee arrangement | Same as above |
| Excessive unconscionable fees | Same as above |
Allowed Fee Arrangements
| Fee Structure | Allowed? |
|---|---|
| Hourly fees | ✅ Yes |
| Flat fees | ✅ Yes |
| Value-based fees (not contingent on outcome) | ✅ Yes |
| Contingent for audit representation | ✅ Yes |
| Contingent for original returns | ❌ No |
Real-World Scenario
Scenario: A client asks you to prepare their Form 1040 for a fee of $300 plus 5% of any refund.
- Allowed? No—this is a contingent fee for an original return.
- Alternative: Charge a flat fee or hourly rate. You can offer a competitive price, but it cannot be tied to the refund amount.
On the Exam
Expect 3-4 questions on fees, typically:
- Prohibition Questions: "Are contingent fees allowed for original returns?"
- Exception Questions: "When ARE contingent fees allowed?"
- Unconscionable Questions: "What makes a fee unconscionable?"
- Disreputable Conduct Questions: "Is charging a refund-based fee disreputable conduct?"
The key is to remember: Prohibited for original/amended returns. Allowed for audit representation and court proceedings. The 120-day exception exists.
Are contingent fees allowed for preparing original tax returns?
When ARE contingent fees allowed?
What is the deadline for filing an amended return under the contingent fee exception?