1. General Rule: Contingent Fees Are Banned
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Original tax returns: Preparers cannot charge fees based on:
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Refund size (e.g., "10% of your refund").
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Tax savings (e.g., "Pay us 20% of what we save you").
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Why? Prevents conflicts of interest (e.g., inflating deductions to boost fees).
Example (Prohibited):
❌ "Our fee is 15% of your refund!" → Banned for preparing a Form 1040.
2. Exception: Audit Representation & Other Special Services
The only allowed contingent fees are for:
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Audit defense (IRS examinations).
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Amended returns (e.g., filing Form 1040-X to correct errors).
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Court appeals (e.g., Tax Court cases).
Example (Allowed):
✅ "We’ll charge 25% of the tax savings if we successfully defend your audit." → Permitted.
Key IRS Source: Circular 230, Section 10.27
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Bans contingent fees unless for:
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IRS examinations (audits).
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Original returns where the fee is fixed by court order (rare).
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Why This Matters for Exams
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Contingent fees = Always wrong for original tax returns.
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Exception = Audit/amended return work.
Exam Tip: If a question mentions "percentage of refund," ask:
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Is this for preparing a return? → Illegal.
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Is this for audit defense? → Legal.
┌──────────────────────┐
| Contingent Fees |
| (Fee based on outcome) |
└──────────┬───────────┘
│
┌───────▼───────┐ ┌─────────────────┐
│ **Prohibited** │ │ **Allowed** │
│ - Original │ │ - Audit defense │
│ tax returns │ │ - Amended │
│ - E-file │ │ returns │
│ transmission │ │ - Court appeals │
└───────────────┘ └─────────────────┘