Section 10.27 of Circular 230 regulates fees charged by tax practitioners concerning matters before the IRS and restricts the use of unconscionable or contingent fees in tax-related representations. In general, these Comments discuss the provisions in § 10.27 addressing “contingent fees,” defined in § 10.27(c)(1) to include “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.” In 2009, the Service and the Department of the Treasury proposed three clarifying changes to § 10.27, all of which we believe would be improvements.

As a general matter, however, we believe that § 10.27 remains too narrow in identifying circumstances when a tax practitioner may agree with a client to be compensated based on the result obtained in a tax matter. We believe that § 10.27 should permit tax practitioners to charge a result-based fee (in whole or in part) in matters before the Service when the taxpayer’s position will be transparent and subject to direct scrutiny by the Service. These cases would include requests for private letter rulings, claims for refund and the like. Moreover, we believe that one of the proposed changes to § 10.27 may have the unintended consequence of prohibiting a relatively common practice, which is an agreement between a tax practitioner and a client, in determining the final fee in a tax matter, to consider the tax result attained. In addition, because the definition of “contingent fee” in § 10.27(c)(1) significantly differs from the common understanding of that term, we believe the title of § 10.27(b) should be changed to minimize confusion; we recommend that the word “Contingent” in both the title of § 10.27(b)(1) and in the defined term in § 10.27(c)(1) be changed to “Prohibited” and that conforming changes be made in the text of § 10.27(b) and 10.27(c)(1).

Finally, we urge the Service and Treasury to repeal the “120-day rule,” which currently prohibits a contingent fee in a matter if a claim for refund or amended return is filed more than 120 days following the commencement of an examination or a challenge to an original return.