Circular 230. It has become the Bible for the IRS. And like the Bible, it has its own list of commandments. One of the big commandments is the prohibition on contingency fees. Section 10.27 says:
Contingent fees on amended returns and tax refunds:
(1) Except as provided in paragraphs (b)(2), (3),
and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.
(2) A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to —
(i) An original tax return; or
(ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.
(3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.
(4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.
In plain English, Circular 230 says that lawyers and accountants can’t charge contingency fees for ordinary tax refund claims and amended returns.
In July, a U.S. District Court Judge in Washington D.C. invalidated those provisions. The court ruled that the IRS didn’t have the statutory authority to impose such rules. Now the Department of Justice’s Tax Division says it will not appeal the ruling meaning the court’s order is final.
A contingent fee is often called a “success fee.” In the tax context, it means whether the lawyer gets paid is based on whether or not a position taken on a tax return is upheld by the IRS or the courts. It may also include fees based on a percentage of the tax refund reported on a return or amount of taxes. Clients often want contingent fees so that they need not advance thousands of dollars in accounting and legal fees. By charging a contingent fee, lawyers take on part of the risk.
The ruling now gives clients and their tax advisers the right to negotiate fees without interference by the IRS.
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The author of this post, Brian Mahany, is a nationally recognized tax lawyer. He and his firm represent taxpayers across the United States in variety of tax matters including tax controversies and tax refund claims.