The Chairman’s Proposal Regarding Contingency Fees

As Congress struggles to complete its work and leave town, Ways and Means Committee Chairman Kevin Brady quietly dropped a provision into an otherwise uncontroversial IRS reform package. The provision bars IRS from regulating contingency fees “in connection with tax returns, claims for refund, or documents in connection with tax returns or claims for refund prepared on behalf of a taxpayer.”

While Circular 230, at Section 10.27, prohibits enrolled agents from charging a contingent fee, it does allow such a “fee for services rendered in connection with the Service’s examination of, or challenge to, an original tax return or an amended return or claim for refund or credit…” It also allows a fee in connection with a claim for credit or refund filed solely in connection with determination of interest or penalties assessed by the IRS. Finally, practitioners may charge a contingent fee for services rendered in connection with any judicial proceeding. The Chairman’s Proposal Regarding Contingency Fees As Congress struggles to complete its work and leave town, Ways and Means Committee Chairman Kevin Brady quietly dropped a provision into an otherwise uncontroversial IRS reform package. The provision bars IRS from regulating contingency fees “in connection with tax returns, claims for refund, or documents in connection with tax returns or claims for refund prepared on behalf of a taxpayer.”

While Circular 230, at Section 10.27, prohibits enrolled agents from charging a contingent fee, it does allow such a “fee for services rendered in connection with the Service’s examination of, or challenge to an original tax return or an amended return or claim for refund or credit…” It also allows a fee in connection with a claim for credit or refund filed solely in connection with determination of interest or penalties assessed by the IRS. Finally, practitioners may charge a contingent fee for services rendered in connection with any judicial proceeding (see Robert Wood in Forbes for further analysis).

The issue of contingent fees has been clouded by two relatively recent court rulings (Loving v. IRS, 742 F.3rd 1013 (D.C. Cir. 2014) and Ridgely v. Lew, 55 F. Supp. 3rd 89 (D.D.C. 2014)). The courts in these cases found IRS lacked the authority to regulate either tax return preparers (Loving) or fee arrangements entered into by practitioners (e.g., EAs, CPAs, attorneys) prior to the onset of adversarial proceedings before IRS (Ridgely, details here). IRS has failed to update Circular 230, however, to reflect the changes resulting from these judicial rulings.

Some commentators are concerned that the Brady language would allow unenrolled preparers to charge a fee contingent on a refund, further encouraging audit roulette beyond what is already a serious problem for many low- and moderate-income taxpayers.

What do you think? NAEA would like your input on what our position should be on this important issue.