Are Contingent Fees Legal for ERC Claims?

Firms that help businesses apply for the Employee Retention Credit (ERC), including StenTam, often charge contingent fees based on the amount of the credit as a way to decrease risk and improve cash flow for clients.

Recently, the news has been filled with headlines such as “Employee Retention Credit Contingent Fees Unlawful Says IRS.” The headline, however, is misleading because contingent fees are not unlawful.

Keep reading to find out why contingent fees are legal for ERC claims and those for other tax credits.

Who Regulates Contingent Fees?

The United States Treasury has the authority to regulate “persons” who practice before the Treasury Department. This includes individuals who practice before the IRS because the agency is under the authority of the Treasury Department. The Treasury has issued regulations governing “practice” before the IRS, commonly known as “Circular 230” (31 CFR Part 10).

Circular 230 covers duties and restrictions of individuals who practice before the IRS, such as the character, reputation and competency of practitioners. The IRS has enforced the Circular 230 regulations against CPAs, attorneys and other tax professionals.

What Does Circular 230 Say About Contingent Fees?

§ 10.27(b) of Circular 230 prohibits contingent fees as they relate to any matter before the IRS, except in the following situations where a practitioner renders services in connection with:

  • An IRS examination of an original tax return
  • An IRS examination of an amended tax return or claim for refund if the return or claim was filed within 120 days of the taxpayer receiving written notice of the examination
  • A claim for credit or refund regarding statutory interest or penalties
  • Any judicial proceeding arising under the Internal Revenue Code

Based on the plain language of § 10.27(b), a contingent fee would not be permitted for the preparation of an amended return. It also wouldn’t be allowed for a claim for refund or credit filed in the ordinary course and not in connection with an IRS examination.

Circular 230 would prohibit contingent fees for most ERC claims because they are usually filed when a taxpayer is not under examination by the IRS and does not expect to be examined. Circular 230 also prohibits contingent fees for other types of credits, such as those for Research & Development (R&D) and the Inflation Reduction Act.

Contingent fee ruling

Courts Disagree with Circular 230’s Contingent Fees Provision

Federal courts, however, disagree and have interpreted Circular 230 to allow contingent fees in connection with amended returns or claims for refunds or credits filed in the ordinary course and not in connection with an IRS examination.

In Ridgely v. Lew (55 F.Supp.3d 89 (D.D.C. 2014)), a federal district court held that Circular 230 did not prevent a CPA from charging contingent fees to file amended returns or claims for refund or credit. The court reasoned that “the plain text of [Circular 230] excludes preparers and filers of Ordinary Refund Claims from the ambit of the IRS’s regulatory authority.” The IRS chose not to appeal the court’s ruling in Ridgely and has not amended Circular 230 in response to the ruling. This means that contingent fees for amended returns and claims for refund or credit, including ERC claims, are permitted.

The Ridgely ruling dealt with tax practitioners who are registered with the IRS, such as attorneys, CPAs, and Enrolled Agents. What about tax practitioners who are not registered with the IRS, such as tax preparers? According to another case, Loving v. IRS (742 F.3d 1013 (D.C.Cir. 2014)), tax return preparers are not subject to the regulations in Circular 230. This means tax return preparers may also charge contingent fees for amended returns and claims for refund or credit.

Contingent Fees Are Lawful

Courts have permitted contingent fees for filing amended returns and claims for refund or credit, despite Circular 230’s language to the contrary. Contingent fees are an important tool for tax professionals and preparers to decrease risk, increase cash flow for clients and incentivize top-notch performance from tax professionals.

If you haven’t yet taken advantage of the ERC refund, reach out to one of our associates today to learn about your business’s eligibility – before the window to retroactively file comes to a close!

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