Contingent Fee

[erchess]

In another thread I learned that it is sometimes ethical to charge a contingent fee. It's good for me to know that. I have stopped telling clients that it would be against the law for me to charge them a contingent fee. However, I have several questions.

I am sure that it was at one time against the rules to base my fee for preparing an original return on the size of the refund we were asking for. The reason why the IRS would wish me not to do that seems obvious. Is this rule still in force?

Why are not all contingent fees banned under the same line of reasoning?

Is it a good business practice to charge a contingent fee? My thought would be that if I charge more because I saved him money this time then he will want a really low fee next time when the outcome is less favorable to him. And yet I hear that some firms are doing their billing based on what they think is the value to the client of the services. So am I shorting myself and/or alternately gouging myself and clients by billing strictly based on the time I put in and any costs I incur? I mean, it is obvious that if a client comes back it must be the case that he viewed my last fee as fair for what he got......

[BHoffman]

I don't think it is especially good to base the fee on the size of the client refund. That is hardly fair to the client. We just report the news, we don't make the news.

Also, I don't think is fair to charge by the hour. Maybe you can prepare a pretty complicated tax return in just one hour because you spent countless hours learning how.

Charging based on the complexity of the return might be the fairest way to both you and the client.

[Lion]

And I'm pretty sure I read recently that for original returns, contingent fees are not allowed. Certainly you'd want to comb through Circular 230 if you were considering that method to learn what's now the regulation.

[erchess]

Comments

I agree it is important to check with Circular 230 and other authorities and secondary sources before doing anything that might be construed as unethical.

As far as complexity of the return, I think time is the best measure of that. The other way I can think of is by the Form unless you want to devise your own based on the issues and the volume of information. The problems with that seem obvious and the problem with forms is that for any given form or schedule one taxpayer may have one that requires two minutes or less and another may have the same form that takes hours. Then there is the fact that one taxpayer brings you one or more grocery bags of receipts while another has them organized for you.

You are of course correct that an inexperienced professional will take longer on any given return than someone with more experience. The more experienced person will bill at a significantly higher rate and may still do any given return for less.

Then too a person who charges by the hour (or for that matter by the form) can always have a minimum fee and perhaps a different minimum for each type of return. I don't personally but one always can. Thus for example if I were going to do it my minimum for an 1120S could be 600 and the meter might only start ti8cking after two and a half hours or maybe it would still start when I did.

I very much agree with the notion that a fee contingent on the bottom line of the return is unfair but I know a lot of clients who want exactly that.

[taxea]

a fee based on return amount is a violation of Cir230, however a deposit or retainer of expected fee based on your normal fees for the work you are doing is okay. If you have a new client and are not sure about ability to pay there is nothing that prohibits you from payment prior to service. If the retainer turns out to be more than your final fee...refund the balance.
Retainers are frequently requried when preparing several years and/or an OIC. One of the reasons is because there are possible expenses on your part that are required to work on the issues. The other is, unless you credit check the client, you do not want to do all the work and then find out the client has nothing to pay you with.