AICPA: Contingent fee provision in tax bill would help unscrupulous tax preparers

The AICPA outlined its concerns to Congress about provisions in the tax bill that could hurt the accounting profession, including a section that allows long-debated contingent fees that it described as “an open invitation to unscrupulous tax preparers.”

“Although we support portions of the legislation, we have significant concern over the consistent decrease in parity that professional service providers have experienced under the Tax Cuts and Jobs Act of 2017 and the even larger parity gap that they would experience under the One Big Beautiful Bill Act,” the AICPA said in a letter sent Tuesday to the chairmen and ranking members of the Senate Finance Committee and the House Ways and Means Committee.

Congress should strike the provision barring Treasury from regulating contingent fees charged for tax returns, refunds, or documentation with tax returns for refunds be struck from the bill, the AICPA wrote in its letter.

“The preparation of an original return on a contingent fee basis could be an incentive to prepare questionable returns, which would result in an open invitation to unscrupulous tax preparers to engage in fraudulent preparation activities that takes advantage of both the U.S. tax system and taxpayers,” the AICPA wrote. “Unknowing taxpayers would ultimately bear cost of these fee arrangements, since they will have remitted the fee to the preparer long before an assessment is made upon the examination of the return.”

Contingent fees typically are based on attaining a specific result, such as a percentage of the refund reported on a return or on the percentage of taxes saved, according to Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10).

The fees were a flash point in filings for the employee retention credit (ERC), a pandemic-era program that was intended to help small businesses stay afloat. The IRS, which blamed unscrupulous promoters for luring businesses into filing questionable claims, initiated a moratorium on processing new claims and offered businesses a way to avoid punishment through a voluntary disclosure program to deal with the influx of ERC claims.

Congress also should retain entity-level deductibility of state and local taxes for all pass-through entities and allow excess business loss carryforwards to offset business and nonbusiness income, the AICPA said.

The proposed bill “unfairly targets specified service trades or businesses (SSTBs),” the AICPA said. “This proposed bill would leave SSTBs in an even worse position than pre-TCJA by prohibiting SSTBs from deducting local taxes, which had been a permissible deduction before the enactment of TCJA.”

Related to contingent fees, the IRS released proposed regulations earlier this year to update rules, a change that the AICPA described as a prohibition on the fees. At a hearing on those rules, the AICPA recommended that the IRS relax that proposal by using the definition of contingent fee found in its Code of Professional Conduct. That code allows only fees that are fixed by the court or other public authorities and in tax matters, ”if determined based on the results of judicial proceedings or the findings of governmental agencies.”

In the letter to Congress, the AICPA also listed several provisions of the tax bill that it supports, including an increase in the Form 1099-K reporting threshold for third-party platforms; making the paid family leave tax credit permanent; and allowing Sec. 529 plan funds to be used for postsecondary credential expenses.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.