Are referral fees illegal or unethical?

[Uncle]

Many tax preparers pay referral fees to individuals who refer prospective clients. This payment may be cash or a reduction of future preparation fees. I have learned that many reputable tax attorneys and one national tax research service are of the opinion that such payments are barred by §162(c)(2):

(2) Other illegal payments. No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1) ) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer. The burden of proof in respect of the issue, for purposes of this paragraph, as to whether a payment constitutes an illegal bribe, illegal kickback, or other illegal payment shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454.

Opinions, please.

[erchess]

initial reaction

I read only the code section you posted and that only once but the way I read is not that I am forbidden by that piece of writing to make a kickback bribe or similar payment but only that I Ia am forbidden to deduct such a payment in the calculation of my taxable income. I cannot speak to the requirements the bar may put on a tax attorney or a cpa association may put on a cpa but I am sure that there is no regulation against an EA offering referral fees to anyone capable of providing valuable referrals. OTOH I believe that I had better have signed permission before I give client contact info to another business and that even then I better not receive anything of substantial value in return.

[John of PA]

The short answer is Yes.

[Dusty2004]

I do not believe it is a problem.

What you quote says

"(2) Other illegal payments. No deduction shall be allowed under subsection (a) for any payment (other than a payment described in paragraph (1) ) made, directly or indirectly, to any person, if the payment constitutes an illegal bribe, illegal kickback, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privilege to engage in a trade or business. For purposes of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer."

A referral fee is not an illegal bribe, kickback or other illegal payment under any law that I currently aware of.

Dusty

[taxxcpa]

Fee-splitting with a non-professional would be illegal, but a referral fee is more like a payment for advertisement. If you pay a newspaper to advertise, that would obviously not be fee-splitting and I think a referral fee paid to a client or non-client would just be a form of advertising.

I've never given anyone a referral fee, but I've given new-client discount coupons which, again, I would consider an advertising expense.

[Uncle]

Do you have a cite?

[QUOTE=taxxcpa;157325]Fee-splitting with a non-professional would be illegal

Thank you, can you please give me a cite?

[taxxcpa]

[QUOTE=Uncle;157330]

Fee-splitting with a non-professional would be illegal

Thank you, can you please give me a cite?

It is a rule of all State Boards of Public Accountancy. It does not apply to non-licensed tax preparers. There may or may not be a similar rule for EAs.

[Roberts]

IMO coupons or discounts aren't unethical or illegal.
I also believe fee splitting depends on the facts of the case.

[ATSMAN]

It depends on the product or service being sold and the regulations.

For example I referred 2 of my clients to my insurance agent to buy life insurance and disability insurance. I count NOT receive any kickback or referral fee because to get that compensation I would need to have an agent's license.

[Uncle]

I bought a legal opinion

The answers in this thread were quite varied, so, being curious, I engaged an attorney to research the question and give me an opinion.

Quote: Re Referral Fee

Dear Mr. Mewhort:

You are an Enrolled Agent with the IRS.

You have asked whether enrolled agents can offer a referral fee to tax preparers, current client, new clients, and any other except attorneys and CPAs (or any other individuals that have referral restrictions in their profession).

I have reviewed the IRS code and regulations to determine if there are any such restrictions.

ITS Circular 230 generally regulates the conduct of Enrolled gents. The only reference in the Circular to referral fees deals with opinions given by the practitioners. (see section 10.35). A covered opinion must prominently disclose a referral fee or referral agreement between the practitioner and any person with respect to promoting, marketing or recommending the entity, plan, or arrangement that is the subject of the opinion. See pages 29 and 30 or the circular enclosed.

Section 162(c)(2) of the IRS code deals with illegal payments and whether they are deductible. However, the consideration for a referral fee must be illegal (criminal penalty or loss of license or privilege to engage in a trade or business) before it is nondeductible. Again, this only deals with whether you could deduct the fee.

Other than these restrictions, referral fees are not illegal.

If you are a member of the National Association of Enrolled Agents, their ethics rules are broader concerning referral fees. I have enclosed sections of a discussion of their rules of ethics. If you are a member of this group and violate their rules of ethics, it could be a basis for a civil suit by some unhappy client if you do not disclose the referral fee. In other words, it not illegal as in a violation of law or regulation, but it could be a basis for a civil lawsuit. And even if you are not a member of this group, it might not be a bad idea to disclose the fee in writing to the prospective client.

If you have any questions regarding the above I would be happy to answer them.

Very truly yours,
Edward C. Kemper
End quote.

[DaveinTexas]

Thank you...but

The answers in this thread were quite varied, so, being curious, I engaged an attorney to research the question and give me an opinion. His letter is attached.

I didn't see the attachment, or maybe I am not seeing how to open it? It's been a long 3 days stuck in the house for me. 18 degrees and icy roads slows us Texans down. No snow plows or snow chains down here!!

Also, thank you for looking into this and for spending your resources on the research, it is much appreciated!

[AZ-Tax]

I too cannot locate the attachment

I too cannot locate the attachment