Under Circular 230, if a practitioner wishes to charge a contingent fee for services rendered in connection with the preparation of an original tax return, which of the following scenarios is permissible?
- AA contingent fee for services rendered in connection with an examination by the IRS of an original tax return.
- BA contingent fee for preparing an amended tax return based on a refund claim for a prior year.
- CA contingent fee for preparing an original Form 1040, U.S. Individual Income Tax Return.
- DA contingent fee for preparing an original Form 1120, U.S. Corporation Income Tax Return, for a start-up company.
Show answer & explanationAnswer & explanation
Correct answer: A. A contingent fee for services rendered in connection with an examination by the IRS of an original tax return.
Circular 230 generally prohibits contingent fees for preparing original tax returns. However, there are exceptions. A contingent fee IS permissible for services rendered in connection with an examination (audit) by the IRS of an original or amended tax return, or for a claim for refund or credit filed solely in connection with the determination of statutory interest or penalties, or for a judicial proceeding arising under the Internal Revenue Code.
Why the other options are wrong
- B. Contingent fees are generally prohibited for preparing amended returns unless it's related to a refund claim for statutory interest/penalties or a judicial proceeding.
- C. Contingent fees are generally prohibited for original tax returns, including Form 1040.
- D. Contingent fees are generally prohibited for original tax returns, including Form 1120.
Circular 230 Contingent Fees
Circular 230 restricts when practitioners can charge contingent fees, generally prohibiting them for preparing original tax returns.
- Generally prohibited for preparing original or amended tax returns.
- Permitted for services in connection with an IRS examination.
- Permitted for claims for refund/credit solely for statutory interest/penalties.
- Permitted for judicial proceedings under the IRC.
Memory trick: Original returns, no contingent earn; audits, yes, the rules you learn.