Could a practitioner charge a contingent fee for South Carolina tax-return or refund-claim work?

Plain-English summary

South Carolina Revenue Ruling #04-3 said a tax practitioner could not charge a contingent fee for preparing an original return or advising on a position taken on an original return.

For an amended return or refund claim, the answer depended on anticipated review. A contingent fee was permitted only when the practitioner reasonably expected the Department or local tax authority to conduct a substantive review. If substantive review was not reasonably anticipated, the fee was prohibited.

The ruling applied these restrictions to attorneys, CPAs, enrolled agents, real-estate appraisers, and other people eligible to represent taxpayers in South Carolina's administrative tax process. It warned that violating the incorporated professional rules could lead to suspension or disbarment from that process.

It also separately stated that a practitioner could not charge a contingent fee in connection with South Carolina job development credits under the cited economic-development guideline.

What this means for you

Tax-return preparers and advisers

Under this historical ruling, changing the label on the service did not avoid the rule. “Advice” included counsel that made return preparation largely mechanical and legal advice directly relevant to an entry on a return or refund claim.

Taxpayers considering refund engagements

The ruling did not approve every percentage-of-refund arrangement. The practitioner had to reasonably anticipate substantive governmental review when the fee agreement was made.

Attorneys, CPAs, enrolled agents, and appraisers

The Department's rule operated alongside each profession's separate ethical and professional-conduct requirements. Compliance with the ruling did not eliminate those other restrictions.

Common questions

Q: Could a practitioner charge a contingent fee to prepare an original South Carolina return?
A: No. The ruling prohibited it for original returns of any kind, including property-tax returns.

Q: What about advice connected to an original return?
A: That was also prohibited when the fee depended on the result.

Q: Were contingent fees always prohibited for amended returns or refund claims?
A: No. The ruling allowed them when the practitioner reasonably anticipated substantive review by the Department or local taxing authority.

Q: Did the ruling cover court proceedings?
A: Its quoted definition of the administrative tax process excluded contested-case hearings before the Administrative Law Judge Division and the courts.

Citations and references

• S.C. Code Ann. § 12-60-90 — representation and conduct in the administrative tax process
• 31 C.F.R. pt. 10, Circular 230 § 10.27 (2002 version) — contingent-fee rules applied by the ruling
• Circular 230 §§ 10.20-10.24 and 10.27-10.34 — incorporated practitioner duties and restrictions

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: RR04-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC Revenue Ruling #04-3

SUBJECT:

Contingent Fees in State Tax Matters

EFFECTIVE DATE: Applies to all periods open under the Statute
SUPERSEDES:

All previous advisory opinions and all oral directives in conflict therewith

REFERENCES:

S.C. Code Ann. Section 12-60-90 (2003) as revised by Act No. 69 of 2003
Treasury Department Circular No. 230 § 10.27; 10.3 (Rev. 7-02)
as found in Title 31 Code of Federal Regulations, Subtitle A, Part 10.27
(Rev. 07-26-02)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2000)
S.C. Code Ann. Section 1-23-10(4) (Supp. 2001)
SC Revenue Procedure # 03-1

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public and
Department personnel. It is a written statement issued to apply principles
of tax law to a specific set of facts or a general category of taxpayers. A
Revenue Ruling is an advisory opinion; it does not have the force or effect
of law and is not binding on the public. It is, however, the Department’s
position and is binding on agency personnel until superceded or modified
by a change in statute, regulation, court decision, or advisory opinion.

Question:
May a practitioner charge a contingent fee for representing taxpayers in the administrative tax
process?
Conclusion:
A practitioner may not charge a contingent fee in the following instances:

1. For preparing an original tax return;
2. For any advice rendered in connection with a position taken or to be taken on an original tax
   return.

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3. For the preparation of, or advice rendered for, an amended tax return or a claim for refund if
the practitioner does not reasonably anticipate that the amended return or claim for refund will be
substantively reviewed by the Department.
If otherwise allowed, a practitioner may charge a contingent fee for the preparation of, or advice
rendered for, an amended tax return or a claim for refund if the practitioner reasonably
anticipates that the amended return or the refund claim will receive substantive review by the
Department.
Discussion:
Section 12-60-90 of the South Carolina Code of Laws (“Code”) controls the representation of
taxpayers during the administrative tax process, including the filing of returns on behalf of
taxpayers as well as communications with state and local tax authorities by a practioner on
behalf of a client. Section 12-60-90 of the Code reads as follows:
(A) For the purposes of this section, the administrative tax process includes
matters connected with presentation to a state or local tax authority, or their
officials or employees, relating to a client's rights, privileges, or liabilities
pursuant to laws, regulations, or rules administered by state or local tax
authorities. These presentations include the preparation and filing of necessary
documents, correspondence with, and communications to, state and local tax
authorities, and the representation of a client at conferences and meetings,
including conferences with the county boards of assessment appeals. It does not
include contested case hearings held by the Administrative Law Judge Division or
the courts.
(B) State and local government tax officials and state and local government
employees may represent their offices, agencies, or both, during the
administrative tax process.
(C) Taxpayers may be represented during the administrative tax process by:
(1) the same individuals who may represent them in administrative tax
proceedings with the Internal Revenue Service pursuant to Section 10.3(a), (b),
and (c), Section 10.7(a), (c)(1)(i) through (c)(1)(vi), and (c)(2)(viii), and Section
10.7(d) and (e) of United States Treasury Department Circular No. 230; and
(2) a real estate appraiser who is registered, licensed, or certified pursuant to
Chapter 60 of Title 40 during the administrative tax process in a matter limited to
questions concerning the valuation of real property.
(D) The department may suspend or disbar from practice in the administrative tax
process, any person authorized by these rules to represent taxpayers, if the person
is shown to be incompetent, disreputable, or fails or refuses to comply with the
rules in subsection (E), or in any manner, with intent to defraud, willfully and
knowingly deceives, misleads, or threatens any claimant or prospective claimant,
by word, circular, letter, or by advertisement. For the purposes of this section,
incompetence and disreputable conduct is defined in Section 10.51 of United
States Treasury Department Circular No. 230. The department may review a
petition for reinstatement as provided in Section 10.81.

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(E) Representatives of taxpayers must comply with the duties and restrictions
contained in Sections 10.20 through 10.24 and 10.27 through 10.34 of United
States Treasury Department Circular No. 230.
(F) For purposes of this section the terms in United States Treasury Department
Circular No. 230 must be given the meanings necessary to effectuate this section.
For example, unless a different meaning is required:
(1) references to United States Treasury Department Circular No. 230 mean the
United States Treasury Department Circular No. 230 as revised through the date
provided for in the definition of the Internal Revenue Code in Section 12-640(A);
(2) references in United States Treasury Department Circular No. 230 to:
(a) the United States or federal are deemed to include references to this State, any
of its political subdivisions, or any two or more of them;
(b) the Internal Revenue Service, the Department of Treasury, Examination
Division, or District Director are deemed to include references to any state or
local tax authority; and
(c) the Director of Practice is deemed to mean the director or his designee.
(3) references to tax return mean appropriate return, including property tax returns
filed with the department;
(4) references to federal tax obligations mean all South Carolina taxes, including
property taxes and property tax assessments, where administered by the
department.
Section 12-60-90 of the Code relies heavily on US Treasury Department Circular 230 (“Circular
230”) in determining who may practice in South Carolina’s administrative tax process. Section
12-60-90 of the Code also looks to Circular 230 to establish how practitioners are to conduct
themselves during the process and the Department’s remedies if practitioners fail to conduct
themselves properly. Section 12-60-90(E) of the Code provides that a representative must
comply with the duties and restrictions contained in §10.20 through §10.24 and §10.27 through
§10.34 of Circular 230. For purposes of Section 12-60-90 of the Code, references in Circular
230 to the United States are deemed to refer to South Carolina and any local taxing authority.
References to the IRS and the Treasury Department are deemed to refer to all state and local
taxing authorities and references to the Director of Practice are deemed to refer to the Director of
the Department or his designee.
Amended as of July 26, 2002, Circular 230 §10.27 prohibits contingency fees in certain
instances. The complete pertinent section of the 2002 version of §10.27 discusses contingent
fees and explains when a contingent fee will be allowed in connection with a tax matter.
(b) Contingent fees. (1) For purposes of this section, a 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 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

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sustained, whether pursuant to an indemnity agreement, a guarantee, rescission
rights, or any other arrangement with a similar effect.
(2) A practitioner may not charge a contingent fee for preparing an original tax
return or for any advice rendered in connection with a position taken or to be
taken on an original tax return.
(3) A contingent fee may be charged for preparation of or advice in connection
with an amended tax return or a claim for refund (other than a claim for refund
made on an original tax return), but only if the practitioner reasonably anticipates
at the time the fee arrangement is entered into that the amended tax return or
refund claim will receive substantive review by the Internal Revenue Service.
Based on the above, if an attorney, CPA, enrolled agent, real estate appraiser, or other
person eligible to represent a taxpayer under Section 12-60-90 of the Code chooses to
charge a contingent fee for preparing an original tax return of any kind (including a
property tax return) he or she is subject to suspension or disbarment from the
administrative tax process by the Department. Further, a practitioner is also subject to
suspension or disbarment from the administrative tax process if he or she charges a
contingent fee for advice given on preparation of an original return. For purposes of this
revenue procedure, “advice” includes, but is not limited to, (1) providing sufficient
counsel to a taxpayer so that the completion of a return, or portion of a return, or a claim
for refund, or a portion of a claim for refund, is largely mechanical, even though the
person providing the counsel does not prepare or review the return; or, (2) providing
advice on specific issues of law when the advice is given with respect to events which
have occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated transactions and the advice is directly relevant to the
determination or existence, characterization, or amount of an entry on a return or claim
for refund.
A practitioner may charge a contingent fee for preparing or advising in connection with an
amended tax return or a claim for refund (other than a claim for refund on an original tax return)
if the practitioner reasonably anticipates the return will receive a substantive review by the
Department or local taxing authority. However, a practitioner may not charge a contingency fee
in such instance if he does not reasonably anticipate that the Department will substantively
review the amended return or claim for refund. Please note, that all claims for refunds that
exceed $5 million must be reviewed by the Budget and Control Board before a refund may be
issued. (See the minutes of the Budget and Control Board meeting of July 14, 1994 which
allowed the $100,000 limit contained in 11-1-45 that applies to settlements of claims to be raised
to $5 million.)
Furthermore, a practitioner may not charge a contingent fee in connection with the job
development credit. The South Carolina Coordinating Council for Economic Development has
developed a guideline that addresses the charging of a contingent fee in connection with a job
development credit matters. The guideline provides that advisors may not charge a contingent
fee based on the application for, or collection of, job development credits by their clients.

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In addition to the general prohibition of contingent fees found in Circular 230 enforced through
the provisions of Code Section 12-60-90, there are also professional rules of conduct for separate
professions such as certified public accountants and appraisers. These professional rules of
conduct restrictions are in addition to any other legal, ethical, or professional limitations that are
imposed on a practitioner by law, regulation, or otherwise. A practitioner engaged in one of
these professions should consult their professional rules of conduct to determine any other
restrictions on charging a contingent fee in connection with a state tax matter.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/ Burnet R. Maybank III
Burnet R. Maybank, III
March 23
____, 2004
Columbia, South Carolina

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