Every tax professional needs to be conscious of how to manage their practice ethically. An important resource in this matter is Circular 230, a publication that regulates practice before the IRS for attorneys, CPAs, and enrolled agents. Even if these professionals have other ethical obligations as defined by their governing body or rules of conduct, following the general concepts of Circular 230 will likely help them fulfill the duties they have in other areas.
A key topic for ethical consideration is fee development. How do you determine what is reasonable to charge a client? One of the benefits of focusing on proactive tax planning (rather than reactive work) is that tax planners can charge a value-based fee instead of an hourly rate. At the same time, tax planners need to be aware of the ways that Circular 230 limits how you can approach fees.
The first stipulation in Circular 230 is that there are to be no “unconscionable fees.” The definition of an “unconscionable fee” is not provided, but a reliable guideline is that a fee should represent a fair exchange of value. If the cost paid versus value provided is disproportionate, the client is not likely to accept the fee, anyway. For example, if your tax planning estimates say that your work will save the client $20,000 per year for the next couple of years, could you charge the client a $100,000 fee? In a normal marketplace, the client is not likely to accept that as a good deal because there is not a fair exchange of value. This would be deemed an unconscionable fee in violation of Circular 230.
Additionally, a former director of the Office of Professional Responsibility, Carol Hawkins, once said that an example of an unconscionable fee is taking the fee but not doing any of the work for that fee. While this statement is very understandable when taken at face value, circumstances do occur when a client engages a tax planner, pays the fee, but then does not provide the information needed to create a tax plan within the necessary timeframe. Because of the engagement, the tax planner loses a slot on their calendar and has to turn away other potential clients—this arguably means there is still an opportunity cost. A tax planner’s engagement letter can also specify that they have the right to retain that fee in this type of situation.
A second stipulation is that contingent fees are prohibited by Circular 230 except under one of these circumstances:
- An examination or challenge of an original tax return or amended tax return or claim for refund or credit
- A claim for penalty or interest relief
- A judicial proceeding arising under the IRC
A contingent fee exists when the fee is based on an outcome, such as:
- A position taken either avoiding challenge or being sustained by the IRS,
- A percentage of the refund on a return or taxes saved,
- A percentage of the taxes saved, or
- A specific result achieved
One example would be if the IRS denies a refund claim, and the tax planner’s contract says that if this happens the client receives a full or partial refund of the fee paid. Because the tax planner’s fee depends on the outcome of the claim, this would be considered a contingent fee.
Notably, the role of the IRS in regulating fees has been litigated. In the case of Ridgely v. Lew, Mr. Ridgely was a CPA who filed an ordinary refund claim and an amended return on behalf of his client. Ridgely then charged a percentage of the refund received as the fee. The court determined that the submission of an ordinary refund claim was not practice before the IRS (since the claim was filed after the original tax return but before the IRS initiated an audit of that return). Therefore, Circular 230’s prohibition on a contingent fee did not apply in this case.
Since Mr. Ridgley is a CPA, it is unclear whether this case would apply to enrolled agents, since their licenses come from the Treasury. At minimum, this case shows that contingent fees may sometimes be allowed—as with most of tax law, it depends on the situation.
To learn more about ethical considerations for tax planning, begin our training to become a Certified Tax Planner today.