Practices and Procedures · Requirements for Enrolled Agents

Fee rules (e.g., contingent, unconscionable)

Two prohibitions, and the second is the examinable one. A practitioner may not charge an unconscionable fee, and may not charge a contingent fee for a matter before the IRS — subject to four exceptions. The definition of contingent fee is wider than most practitioners assume, and it catches arrangements that never look like a percentage.

The rule

Unconscionable fees. A practitioner may not charge an unconscionable fee in connection with any matter before the IRS (Circular 230 § 10.27(a)). The term is not defined; it is a standard, judged on the circumstances.

Contingent fees are prohibited for services rendered in connection with any matter before the IRS, except in four cases (§ 10.27(b)(1)).

The four exceptions. A contingent fee is permitted for services rendered in connection with:

1. The Service’s examination of, or challenge to, an original tax return (§ 10.27(b)(2)(i));
2. The Service’s examination of or challenge to an amended return or claim for refund or credit, where that amended return or claim was filed within 120 days of the taxpayer receiving written notice of the examination of, or written challenge to, the original return (§ 10.27(b)(2)(ii));
3. A claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the IRS (§ 10.27(b)(3)); and
4. Any judicial proceeding arising under the Internal Revenue Code (§ 10.27(b)(4)).

What counts as a contingent fee. 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 either by the IRS or in litigation. It includes a fee based on a percentage of the refund reported on a return, a percentage of the taxes saved, or one that otherwise depends on the specific result attained (§ 10.27(c)(1)).

And the trap in the definition. A contingent fee also includes any arrangement in which the practitioner will reimburse the client for all or part of the client’s fee if a position is challenged or not sustained — whether by indemnity agreement, guarantee, rescission rights, or any other arrangement with a similar effect (§ 10.27(c)(1)). A flat fee with a money-back guarantee is a contingent fee.

“Matter before the IRS” is broad. It includes tax planning and advice, preparing or filing or assisting in preparing or filing returns or claims, and all matters connected with a presentation to the IRS relating to a taxpayer’s rights, privileges or liabilities — including preparing and filing documents, corresponding and communicating with the IRS, and rendering written advice (§ 10.27(c)(2)).

Publishing fees, and the 30-day rule. A practitioner may publish a written schedule of fees and disseminate fixed fees for specific routine services, hourly rates, ranges of fees, and the initial consultation fee; any statement about matters where costs may be incurred must disclose whether the client bears them. Having published, a practitioner may charge no more than the published rates for at least 30 calendar days after the last date of publication (§ 10.30(b)).

How it works in practice

The exceptions are about defending, not about claiming. Once the IRS has opened an examination or made a challenge, a contingent fee is permitted. What is prohibited is contingency on the original filing position — a percentage of the refund a practitioner produces on a return that has never been questioned. The 120-day exception exists so a practitioner who files an amended return in reaction to a written notice is treated the same as one defending the original.

Count the 120 days from the taxpayer’s receipt of written notice, not from the filing and not from the examination’s start. An amended return filed on a hunch, before any notice, does not qualify however soon the examination follows.

The indemnity limb catches marketing arrangements. “No refund, no fee”, “we will pay your penalty if this is disallowed”, and rescission rights on the engagement letter are all within § 10.27(c)(1)‘s final sentence. The fee itself may be a fixed sum; what makes it contingent is that the practitioner bears the outcome risk.

Unconscionability has no test, so treat it as a facts case. What makes a fee unconscionable is disproportion — to the work, to the amount at stake, to what the client understood they were agreeing. It travels with other complaints, because a fee that shocks usually accompanies an engagement that went wrong in some other way, and a fee dispute does not excuse withholding the client’s records under § 10.28.

How this has changed

Section 10.27 was rewritten by T.D. 9359 (72 FR 54548, 26 September 2007), which replaced a narrower rule with the present structure: the four exceptions, the wide definition of contingent fee, and the indemnity limb. The earlier version permitted contingent fees far more broadly, so material predating 2007 is unreliable on this section. The section is applicable to fee arrangements entered into after 30 March 2008. The fee-publication provisions in § 10.30(b), including the 30-day rule, come from T.D. 9527 (76 FR 32286, 3 June 2011).

Exam focus

The two prohibitions, and that unconscionability is undefined. The four exceptions, in particular the 120-day rule and that it runs from receipt of written notice. The definition of contingent fee — percentage of refund, percentage of taxes saved, dependent on the result attained — and the indemnity limb, which is the most commonly missed part of this section. That tax planning and advice is a matter before the IRS. The 30-day published-fee rule from § 10.30(b).

Check yourself

1. A contingent fee is permitted for services in connection with: (A) Preparing an original return claiming a large refund (B) The IRS’s examination of or challenge to an original return (C) Any amended return (D) Tax planning advice Answer: B. Circular 230 § 10.27(b)(2)(i).

2. A practitioner charges a fixed fee and agrees to refund it if the IRS successfully challenges the position. This is: (A) Permitted, the fee being fixed (B) A contingent fee, because the practitioner reimburses the client if the position is not sustained (C) Permitted if disclosed in writing (D) An unconscionable fee Answer: B. Section 10.27(c)(1).

3. The 120-day period in § 10.27(b)(2)(ii) runs from: (A) The filing of the amended return (B) The taxpayer’s receipt of written notice of the examination of, or challenge to, the original return (C) The start of the examination (D) The due date of the original return Answer: B.

4. A contingent fee is permitted for a claim for refund filed solely in connection with: (A) A disputed deduction (B) The determination of statutory interest or penalties assessed by the IRS (C) A carryback (D) An amended return filed at any time Answer: B. Section 10.27(b)(3).

5. Having published a schedule of fees, a practitioner may charge no more than the published rates for: (A) 7 days (B) At least 30 calendar days after the last publication date (C) One year (D) The remainder of the tax year Answer: B. Circular 230 § 10.30(b)(2).