Contingent Fees for Refund Claims Under Circular 230

Circular 230 10.27(b) bans all contingent fees in tax matters except for three situations: during a challenge to a tax return, a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service, and any judicial proceeding.

In 2014, the U.S. District Court decided Ridgley v. Lew. Ridgley sought "declaratory judgment that the IRS lacked statutory authority to promulgate contingent fee restrictions on those preparing and filing Ordinary Refund Claims pursuant to Section 10.27 of Circular 230." In the case, Ridgley prevailed and the IRS was enjoined was enforcing Circular 230 Section 10.27.

Practitioners are now able to use contingent fees with clients. However, it should be noted that CPAs and attorneys need to follow their state ethics rules, which may still ban these fees.

One interesting note from the case: "[b]ecause a CPA prepares and files an Ordinary Refund Claim before becoming a legal representative and presenting his case, preparing and filing such claims is not within the scope of the actions originally targeted by Section 330." This follows the ruling in Loving and seems to really restrict when Circular 230 actually applies to practitioners.

For example, Circular 230 10.30 bans certain types of advertising from practitioners. It would follow under the logic of Ridgley that this section would also be invalid since the advertising is done prior to "becoming a legal representative and presenting" a case before the IRS. It will be interest in the future to see if the IRS OPR narrows the scope of Circular 230 to follow Loving and Ridgley or if they will continue to enforce Circular 230 under the old regime waiting for further legal challenges.

Relevant Cites:
Ridgley v. Lew
Loving v. IRS