Contingent fees under Circular 230 §10.27: the rules and the workarounds

Circular 230 §10.27 states the rule in one sentence: a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS — and then swallows much of it with exceptions. The exceptions are for controversy, not compliance: fees contingent on the outcome of an examination or challenge, on claims for statutory interest or penalties, and on judicial proceedings. What the rule actually forbids is the arrangement at the center of the specialty-tax market — preparing an original return or an ordinary refund claim for a percentage of the tax saved.

What §10.27 permits and prohibits

The text — in Circular 230, §10.27 — defines a contingent fee broadly: any fee based on whether a position avoids challenge or is sustained, including fees the practitioner refunds if the position fails. The permitted zones, compressed:

Contingent-fee treatment by service type under §10.27:

The refund-claim line is the one that bites specialty work. A retroactive R&D credit claim, a Section 174A small-business amended return, a look-back cost segregation with a Form 3115 — each is return preparation, not controversy, and a practitioner charging a percentage of the recovery is inside the prohibition. (One caveat practitioners raise: in Ridgely v. Lew (D.D.C. 2014), a district court held Treasury lacked authority to apply §10.27 to the mere preparation of ordinary refund claims by a CPA not otherwise practicing before the IRS in the matter. The IRS did not appeal, but has not amended the rule; state accountancy contingent-fee rules and AICPA ethics standards impose their own, often stricter, limits regardless — see aicpa-cima.com. Treating §10.27 as governing remains the conservative and common posture.)

How boutiques structure around it

Circular 230 binds practitioners — attorneys, CPAs, enrolled agents and others practicing before the IRS. A study shop staffed by engineers and "consultants," which delivers a report but signs nothing and represents no one, has a colorable argument it is outside the regime entirely. The common architectures: the percentage fee sits in a consulting agreement for "technical analysis"; any credentialed employees stay off the engagement; exam support is promised but structured as a separate, hourly engagement (which would be permissible contingent territory anyway); and the taxpayer's own CPA files the return. Whether every such structure survives scrutiny — the non-signing-preparer rules of Treas. Reg. §301.7701-15 reach study providers for penalty purposes no matter how the fee is labeled — the market reality is that percentage pricing is standard in R&D and common in cost segregation.

What this means for the signing CPA

The CPA cannot take a share of the boutique's fee without importing the §10.27 problem, and referral-fee arrangements carry their own ethics baggage (see managing boutique relationships). But the deeper issue is not the CPA's fee — it is the study's tilt. A fee set at, say, 20% of credits "found" is a standing instruction to find more, and §10.27 exists precisely because that incentive corrodes objectivity. The signing preparer inherits the corroded output along with full Section 6694 exposure. Practical consequences: ask every provider how it is compensated and record the answer; review contingent-fee studies with elevated skepticism, especially estimation-heavy allocations; weight fee structure in the firm's standing diligence, as in our provider-vetting playbook; and tell the client plainly that "no fee unless we find credits" is a sales model, not a safeguard. A contingent fee is not proof of bad work — plenty of percentage-fee studies are sound — but it is a reason to check, and the checking is the CPA's job.