The Internal Revenue Service has softened its opposition to contingent fees charged by Circular 230 practitioners. Originally, the IRS proposed permitting a contingent fee only in connection with an IRS examination or the challenge of an original return, or an amended return filed before a notice of examination was received.Under the final rules, a tax practitioner will be allowed to charge a contingent fee for services rendered in connection with the IRS examination of, or challenge to, an original return, or an amended return or claim for refund or credit where it was filed within 120 days of the taxpayer receiving a written notice of the examination, or a written challenge to the original return.
The final regs also permit the use of contingent fees for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties, according to the IRS, because, "There is no exploitation of the audit lottery in these situations, as they are generally completed on a post-examination basis."
They also adopt a proposal that allows tax practitioners to charge contingent fees for services in connection with any judicial proceeding under the code.
STRIKING A BALANCE
"This is certainly more favorable to tax preparers than the proposed version, and it seems to balance the IRS desire to stop preparers from advocating frivolous positions in the hope that a return will not be examined with the desire of preparers to have the freedom to enter into contingent-fee arrangements where they believe they can show the IRS that their position is correct," said Bob Scharin, senior tax analyst at Thomson Tax & Accounting. "The audit process is what the IRS is concerned about. They feel that if so few returns are examined, a preparer shouldn't be tempted to play the audit lottery and get a contingent fee just because the IRS is too busy to look at a return and challenge the position claimed on the return."
Section 10.27 of Circ. 230 defines a contingent fee as any fee that is based, in whole or in part, on whether or not 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 any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client's fee in the event that a position taken on a return or other filing is challenged by the IRS or is not sustained.
"This expansion of contingent fees beyond the original limitations is in large part because of our testimony," said Martin Davidoff, a CPA and tax liaison chair of the American Association of Attorney-CPAs, who testified at hearings on the proposed rules. A number of practitioner groups opposed the contingent-fee ban, including the American Association of CPAs, the American Bar Association Tax Section, the AAA-CPA, the National Association of Enrolled Agents and the National Association of Tax Professionals.
"We commend the service for listening to what we had to say," said Mark Ely, previous chair of the AICPA Practice and Procedure Committee and a partner in the Tax Account Analysis Review Program, formerly a part of Big Four firm KPMG. "This is 100 percent of our practice - interest and penalty review." Ely and two partners acquired the group from KPMG when the firm entered into a deferred-prosecution agreement with the Justice Department. "One part of the agreement was that the tax practice couldn't have any contingent or value fees across the board for all federal tax purposes," he said. "Our clients didn't want to renegotiate fixed or hourly fees." TAARP services over 300 of the Fortune 1000, and over half of the Fortune 50, with a review of interest and penalties opportunities for areas where too much was paid or more interest should be returned.
Prior to 1989, the AICPA did not permit contingent fees at all, according to Tom Ochsenschlager, institute vice president for taxation. "The Federal Trade Commission said if we didn't permit contingent fees, it would be in restraint of trade," he said.
"What they've done is listened and allowed a broader approach, but we would have preferred them to have left it the way it was," said Davidoff. "I'm troubled by the word 'solely,' in the interest and penalty reviews. If I file for interest and penalties but say, 'By the way, you forgot to credit this payment,' is that 'solely?'"
He noted that the broadened allowance of contingent fees would not help in the filing of amended returns to correct a taxpayer's liability. "Frequently, a small taxpayer will make a mistake on a return. For example, they might omit allowable deductions, carryovers or exemptions, or include non-taxable income as taxable," he said. "When I review it and tell them they can get back $5,000, but it will cost $750 to amend the return and they might not get their money back, they invariably ask, 'Will you make it contingent?' Now I have to tell them I can't do it."
"They would prefer to pay one third of the refund if there's a risk they will get nothing," he said. "They see it as throwing good money after bad, because they don't understand the inner workings of the IRS."
The result is that the rules penalize good behavior, he said. "I have no problem with them prohibiting contingent fees on the original return, because that's not likely to be audited or looked at," he said. "But contingent fees have a place."
The final regulations under Circular 230 also create a new enrolled retirement plan agent designation to practice before the IRS, and require that disclosure of any disciplinary procedure against a practitioner be delayed until the decision becomes final.
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