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Contingent Fees for Refund Cases - Why Not?

9 Jul 2012

Recently, tax services firm Ryan LLC reopened the question of whether advisors should be allowed to enter into contingent fee arrangements for certain matters before the Internal Revenue Service (IRS). The rationale for banning such arrangements is not so obvious, especially as there are already a number of measures (severe penalties) in place to help keep tax compliance in check. Taxand US briefly describes the Ryan lawsuit, the types of arrangements in question, the history of the treatment of such arrangements and why, Constitutional arguments aside, the restrictions on these contingent fee arrangements should not be necessary.

The Process of Refund Claims

To understand the issue, let's take a look at refunds claims and what is generally required. The IRS is generally authorised to refund overpayments of tax - that is, taxpayer money in the hands of the government. The process is that, under IRC Section 7422(a), taxpayers are required to file refund claims with the IRS before they can file suit for a refund. Generally, taxpayers have three years from the filing of the return, or two years from payment of the tax, to file their refund claim (which should include all of the grounds and support for the claim). If a claim is not properly filed, the IRS can simply reject the claim, regardless of the merit of the case. In the usual course, a revenue agent will review the claim and either accept or disallow the claim in full or in part. If the claim is disallowed, the taxpayer can request a conference with the IRS Appeals Office. If no conference is requested, or the Appeals Officer agrees with the revenue agent's determination, the IRS will issue a statutory notice of claim disallowance. The taxpayer then has two years from the date the notice of disallowance is mailed to begin a refund suit.

Taxand US takes a look at the issue of contingent fees for refund cases in greater detail

Taxand's Take

While the constitutional arguments in the Ryan case are debatable and there are differing opinions on whether a ban on certain contingent fees in refund cases is really needed, it will be interesting to watch the progression of the case and see whether there may be broader implications for other types of contingent fee arrangements. In the meantime, taxpayers should keep in mind that there are still a few areas under Circular 230 that expressly provide for the use of contingency fee arrangements.

Your Taxand contact for further queries is:
Lauren Byrne
T. +1 212 328 8732


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