Engagement and EIC

[Bert73]

What are your thoughts on adding a statement in the yearly engagement letters that your clients sign, on the Earned Income Credit? Something to the effect of, if the client has been found negligent of information pertaining to the eligibility of the credit, an additional $500 will be billed to the client.

I am just throwing this out there for added thoughts, after a recent discussion I had about the credit.

[taxea]

I think that is the IRS' job.

[JohnH]

What are your thoughts on adding a statement in the yearly engagement letters that your clients sign, on the Earned Income Credit? Something to the effect of, if the client has been found negligent of information pertaining to the eligibility of the credit, an additional $500 will be billed to the client.

I am just throwing this out there for added thoughts, after a recent discussion I had about the credit.

You could add it to the engagement letter, but you'd probably never collect if it happened. If it doesn't fall afoul of the "contingent fee" prohibition, maybe having it in there would scare the devious clients into being more truthful.

[Bert73]

This was my thoughts too!

This was my thoughts too, I do realize that the fee would probably never be paid but it never would have been about the fee anyway. After taking part in yesterdays IRS webinar, it had me curious on what the definition of a contingent fee was in circular 230. I do not charge a contingent fee on any return I prepare, but after the discussion I had, I wandered if this fee were to be added to an engagement letter might raise some eyebrows or would be considered common practice.


(1) Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect.
(2) Matter before the Internal Revenue Service includes tax planning and advice, preparing or filing or assisting in preparing or filing returns or claims for refund or credit, and all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, rendering written advice with respect to any entity, transaction, plan or arrangement, and representing a client at conferences, hearings, and meetings.

[taxea]

This was my thoughts too, I do realize that the fee would probably never be paid but it never would have been about the fee anyway. After taking part in yesterdays IRS webinar, it had me curious on what the definition of a contingent fee was in circular 230. I do not charge a contingent fee on any return I prepare, but after the discussion I had, I wandered if this fee were to be added to an engagement letter might raise some eyebrows or would be considered common practice.


(1) Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect.
(2) Matter before the Internal Revenue Service includes tax planning and advice, preparing or filing or assisting in preparing or filing returns or claims for refund or credit, and all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, rendering written advice with respect to any entity, transaction, plan or arrangement, and representing a client at conferences, hearings, and meetings.

Isn't that covered by E&O insurance?