[Federal Register Volume 74, Number 143 (Tuesday, July 28, 2009)]
[Proposed Rules]
[Pages 37183-37185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-17743]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG-113289-08]
RIN 1545-BH81


Contingent Fees Under Circular 230

AGENCY: Office of the Secretary, Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document proposes modifications of the regulations 
governing practice before the Internal Revenue Service (Circular 230). 
These proposed regulations affect individuals who practice before the 
IRS. The proposed amendments modify the rules relating to contingent 
fees under Circular 230. This document also provides notice of a public 
hearing on the proposed regulations.

DATES: Written or electronically generated comments must be received by 
September 10, 2009. Outlines of topics to be discussed at the public 
hearing scheduled for November 20, 2009 at 10 a.m. must be received by 
September 10, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-113289-08), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
113289-08), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS and REG-113289-
08). The public hearing will be held in Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Amy L. Mielke at (202) 622-4940; concerning submissions of comments and 
the public hearing, Regina Johnson at (202) 622-7180; (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    Section 330 of title 31 of the United States Code authorizes the 
Secretary of the Treasury to regulate practice before the Treasury 
Department. The Secretary has published the regulations in Circular 230 
(31 CFR part 10). On September 26, 2007, the Treasury Department and 
the IRS published final regulations in the Federal Register (72 FR 
54540) modifying rules governing the general standards of practice 
before the IRS, including the rules relating to contingent fees in 
Sec.  10.27 of Circular 230. Section 10.27 of the final regulations 
generally precludes a practitioner from charging a contingent fee for 
services rendered in connection with any matter before the Internal 
Revenue Service, including the preparation or filing of a tax return, 
amended tax return or claim for refund or credit. The final 
regulations, however, permit a practitioner to charge a contingent fee 
for services rendered in connection with the IRS examination of, or 
challenge to: (i) An original tax return, or (ii) an amended return or 
claim for refund or credit when the amended return or claim for refund 
or credit was filed within 120 days of the taxpayer receiving a written 
notice of the examination of, or a written challenge to, the original 
tax return. The final regulations also permit a practitioner to charge 
a contingent fee for services rendered in connection with a claim for 
refund or credit of interest and penalties assessed by the IRS, and for 
services rendered in connection with a judicial proceeding arising 
under the Internal Revenue Code. The final amendments to Sec.  10.27 
made by the final regulations apply to fee

[[Page 37184]]

arrangements entered into after March 26, 2008.
    Section 406 of the Tax Relief and Health Care Act of 2006, Public 
Law 109-432 (120 Stat. 2958) (December 20, 2006) (the Act) amended 
section 7623 of the Internal Revenue Code concerning the payment of 
awards to certain persons who detect underpayments of tax. Prior 
statutory authority to pay awards at the discretion of the Secretary 
was re-designated as section 7623(a), and a new section 7623(b) was 
added to the Code. Additional off-Code provisions in section 406 of the 
Act established a Whistleblower Office within the IRS and addressed 
reward program administration issues. See Notice 2008-4, 2008-2 IRB 
253, for interim guidance applicable to award claims submitted under 
the authority of section 7623.
    After consideration of comments received following the publication 
of the final regulations on contingent fees and the Act, on March 26, 
2008, the Treasury Department and the IRS published Notice 2008-43, 
2008-15 IRB 748, providing interim guidance and information concerning 
contingent fees under Circular 230. The interim guidance in Notice 
2008-43 clarified that Sec.  10.27(b)(2)(ii) of Circular 230 does not 
require the IRS to furnish a written notice of examination to a 
taxpayer as a prerequisite to a practitioner charging a contingent fee 
for services rendered in connection with an IRS examination of, or 
challenge to, an amended return. The interim guidance also clarified 
that Sec.  10.27 permits practitioners to charge a contingent fee with 
respect to whistleblower claims under section 7623. The interim rules 
in Notice 2008-43 are applicable to fee arrangements entered into after 
March 26, 2008, and will remain in effect until these proposed 
regulations are finalized.

Explanation of Provisions

    This document proposes modifications to the standards for 
contingent fees consistent with the interim guidance provided in Notice 
2008-43. Section 10.27 generally prohibits a practitioner from charging 
a contingent fee for services rendered in connection with any matter 
before the IRS. The primary rationales behind the prohibition on 
contingent fees is to preclude any fee arrangement that is related to 
or requires a favorable ruling by the IRS and that has the potential to 
exploit the audit selection process or compromise a practitioner's duty 
of independent judgment. Consistent with the interim guidance provided 
in Notice 2008-43, proposed revisions to Sec.  10.27 provide that a 
practitioner may charge a contingent fee in three limited exceptions. 
Under proposed Sec.  10.27(b)(2)(i) and (ii), a practitioner may charge 
a contingent fee for services rendered in connection with the IRS's 
examination of, or challenge to: (i) An original tax return; or (ii) an 
amended return or claim for refund or credit filed before the taxpayer 
received a written notice of examination of, or a written challenge to, 
the original tax return (or filed no later than 120 days after the 
receipt of such written notice or written challenge). The intent of 
this exception is to discourage the tactical preparation of a refund 
claim or amended return filed late in the examination process. The 
exception for contingent fee arrangements with respect to an amended 
return or claim for refund or credit may be used if the amended return 
or claim for refund or credit is filed before the taxpayer receives 
written notice of the examination or written challenge to the original 
return (or if the taxpayer never receives such notice or writing) or 
within 120 days of the taxpayer receiving the notice or writing. For 
purposes of proposed Sec.  10.27(b)(2)(ii), the 120 days is computed 
from the earlier of a written notice of the examination, if any, or a 
written challenge to the original return. Further, under proposed Sec.  
10.27(b)(3) and (4), practitioners also may charge a contingent fee for 
services rendered in connection with a claim for refund or credit of 
interest and penalties assessed by the IRS, and for services rendered 
in connection with a claim under section 7623.
    In response to comments received following the publication of the 
final regulations on contingent fees, this document also clarifies the 
definition of a contingent fee in Sec.  10.27(c)(1) to provide that a 
contingent fee includes 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 tax result attained. 
The definition in Sec.  10.27(c)(1) states that a contingent fee 
depends on the specific result attained without directly providing that 
it is the specific tax result that is relevant to the definition of a 
contingent fee. Contingent fees based on the closing of a transaction 
or other non-tax contingencies do not present the same concerns posed 
by tax-related contingent fees. Accordingly, this document clarifies 
the existing definition to provide that a contingent fee includes, but 
is not limited to, any fee that depends on the specific tax result 
obtained in any given transaction.
    The scope of these regulations is limited to the rules relating to 
contingent fees under the general standards of practice before the IRS. 
These regulations do not alter or supplant other ethical standards 
applicable to practitioners.

Effect on Other Documents

    Notice 2008-43, 2008-15 IRB 257, will be obsolete when regulations 
finalizing these proposed regulations are published in the Federal 
Register.

Special Analyses

    It has been determined that this proposed rule is not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It is hereby certified that 
these regulations will not have a significant economic impact on a 
substantial number of small entities. Persons authorized to practice 
before the IRS have long been required to comply with certain standards 
of conduct. These regulations do not alter the basic nature of the 
obligations and responsibilities of these practitioners. These 
regulations clarify when a practitioner may charge a contingent fee 
under Sec.  10.27(b)(2) in response to public comments. Therefore, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small businesses.

Comments and Public Hearing

    Before the regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) and electronic comments that are submitted timely 
to the IRS. The Treasury Department and the IRS specifically request 
comments on the clarity of the proposed regulations and how they can be 
made easier to understand. All comments will be available for public 
inspection and copying.
    The public hearing is scheduled for November 20, 2009, at 10 a.m., 
and will be held in the Auditorium, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. 
All visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to

[[Page 37185]]

attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of 
this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by September 10, 2009 and an outline of the topics 
to be discussed and the time to be devoted to each topic by September 
10, 2009. A period of 10 minutes will be allocated to each person for 
making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of the regulations is Amy L. Mielke of the 
Office of the Associate Chief Counsel (Procedure and Administration).

List of Subjects in 31 CFR Part 10

    Accountants, Administrative practice and procedure, Lawyers, 
Reporting and recordkeeping requirements, Taxes.

Proposed Amendments to the Regulations

    Accordingly, 31 CFR part 10 is proposed to be amended as follows:
    Paragraph 1. The authority citation for 31 CFR part 10 continues to 
read as follows:

    Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et 
seq.; 5 U.S.C. 301, 500, 551-559; 31 U.S.C. 321; 31 U.S.C. 330; 
Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-
1953 Comp., p. 1017.

    Paragraph. 2. Section 10.27 is amended by revising paragraphs (b), 
(c)(1), and (d), and by adding paragraph (e) to read as follows:


Sec.  10.27  Fees.

* * * * *
    (b) Contingent fees--(1) Except as provided in paragraphs (b)(2), 
(3), (4), and (5) of this section, a practitioner may not charge a 
contingent fee for services rendered in connection with any matter 
before the Internal Revenue Service.
    (2) A practitioner may charge a contingent fee for services 
rendered in connection with the Internal Revenue Service's examination 
of, or challenge to--
    (i) An original tax return; or
    (ii) An amended return or claim for refund or credit filed before 
the taxpayer received a written notice of examination of, or a written 
challenge to, the original tax return; or filed no later than 120 days 
after the receipt of such written notice or written challenge. The 120 
days is computed from the earlier of a written notice of the 
examination, if any, or a written challenge to the original return.
    (3) A practitioner may charge a contingent fee for services 
rendered in connection with a claim for credit or refund filed solely 
in connection with the determination of statutory interest or penalties 
assessed by the Internal Revenue Service.
    (4) A practitioner may charge a contingent fee for services 
rendered in connection with a claim under section 7623 of the Internal 
Revenue Code.
    (5) A practitioner may charge a contingent fee for services 
rendered in connection with any judicial proceeding arising under the 
Internal Revenue Code.
    (c) * * *
    (1) Contingent fee is any fee that is based, in whole or in part, 
on whether or not a position taken on a tax return or other filing 
avoids challenge by the Internal Revenue Service or is sustained either 
by the Internal Revenue Service or in litigation. A contingent fee 
includes 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 tax result attained. A contingent fee 
also includes any fee arrangement in which the practitioner will 
reimburse the client for all or a portion of the client's fee in the 
event that a position taken on a tax return or other filing is 
challenged by the Internal Revenue Service or is not sustained, whether 
pursuant to an indemnity agreement, a guarantee, rescission rights, or 
any other arrangement with a similar effect.
    (2) * * *
    (d) Applicability date. This section is applicable to fee 
arrangements entered into after March 26, 2008.
    (e) Effective date. This section is effective on the date that the 
final regulations are published in the Federal Register.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-17743 Filed 7-27-09; 8:45 am]
BILLING CODE 4830-01-P