CPA Billing Ethics: Contingent Fees, Commissions, and Client Records

CPA billing ethics are governed primarily by the AICPA Code of Professional Conduct, with Circular 230 adding federal rules for anyone practicing before the IRS. Together, these frameworks dictate how a CPA sets fees, whether a fee can depend on an outcome, when commissions are allowed, how client money must be held, and what a CPA can and cannot withhold when a bill goes unpaid. Violations are enforced by state boards of accountancy and can lead to fines, mandatory education, suspension, or permanent loss of the CPA license.

What Makes a Fee Reasonable

Every fee a CPA charges must be reasonable under the circumstances. Circular 230 goes further for tax work and explicitly prohibits “unconscionable” fees.¹ Neither rulebook publishes a dollar threshold. Reasonableness depends on the time and labor involved, the complexity of the work, the skill the engagement demands, and the experience and reputation of the CPA or firm.

Clients are entitled to understand the basis for a fee before work begins. Whether the arrangement is hourly, fixed, or on retainer, the payment terms, invoicing schedule, and late-payment policies should be spelled out in advance. A CPA who fails to communicate fee expectations clearly risks an ethical complaint even when the underlying dollar amount is defensible.

Contingent Fees: When They’re Banned

A contingent fee is any fee that depends on the outcome of the work. The classic example is a tax preparer charging a percentage of the refund. Both the AICPA Code and Circular 230 regulate these arrangements, and a CPA has to satisfy both.

The AICPA Rule

Under the AICPA Code, a CPA cannot prepare an original or amended tax return, or file a refund claim, for a contingent fee. That prohibition applies whether or not the CPA also performs attest services for the client.²

Separately, contingent fees of any kind are banned when the CPA or firm also performs attest services for that client. Attest services here mean audits and reviews, compilations where third-party reliance is expected and the report does not disclose a lack of independence, and examinations of prospective financial information.² If the CPA’s pay depends on the financial outcome, the opinion on those same statements cannot be trusted.

There is one narrow safe harbor. A fee is not treated as contingent if the CPA can show at the time of the arrangement that a government agency will give the matter substantive consideration. That covers representing a client in an IRS examination or seeking a private letter ruling, where the outcome turns on independent agency review.²

Circular 230 Exceptions

For work before the IRS, Circular 230 bans contingent fees as a general rule and then permits them in four specific situations: representing a client in an IRS examination or challenge of an original return; an amended return or refund claim filed within 120 days of written notice of an examination; claims that turn solely on whether statutory interest or penalties were calculated correctly; and judicial proceedings arising under the Internal Revenue Code.¹

Preparing an original return for a percentage of the refund is not on that list. The definition of contingent fee under Circular 230 is also broad enough to cover arrangements where the practitioner reimburses the client if the IRS challenges a position, including indemnity agreements, guarantees, and rescission clauses.¹

A Change on the Horizon

In late 2024, the Treasury Department proposed regulations that would eliminate the current §10.27 fee section and reclassify certain contingent fee arrangements as “disreputable conduct” under a new §10.51. If finalized, charging a contingent fee for preparing any original or amended return before an examination begins would carry the same disciplinary weight as fraud or willful incompetence.³ The proposed rules have not been finalized.

Commissions and Referral Fees

A commission is compensation a CPA receives for recommending or selling a third party’s product or service to a client. A referral fee is compensation for steering a client to another professional, or for receiving a client through such a referral. Both are permitted under the AICPA Code, but only with safeguards.

The central safeguard is written disclosure. The CPA has to tell the client in writing about the arrangement, including how the compensation is calculated, before the transaction or referral takes place.² A vague reference in boilerplate language does not meet the requirement. The disclosure has to be specific enough for the client to judge whether the recommendation might be influenced by the payment.

Commissions and referral fees are flatly prohibited when the CPA or firm also performs attest services for that client. The prohibited attest services are the same as for contingent fees. The prohibition covers the entire period of the attest engagement and the period covered by the historical financial statements involved.² A CPA who accepts a commission from a product vendor and later takes on that same client’s audit has a violation stemming from the earlier payment.

If the CPA provides only tax or consulting services, commissions and referral fees are allowed with the written disclosure. State boards sometimes impose stricter rules, including a specific signed consent form rather than a disclosure letter, so the AICPA standard is the floor.

When Unpaid Fees Threaten Independence

Billing ethics reach beyond what a CPA charges. When an attest client owes the CPA money, that outstanding balance creates a financial interest in the client that can compromise independence. The AICPA treats unpaid fees, including unbilled work and notes receivable, as potential threats to objectivity.²

The rule works on two axes: how significant the unpaid amount is to the CPA, and how long it has been outstanding. Fees that are clearly insignificant and relate to services provided less than a year before the attest report is issued raise no independence problem. Fees that are significant and more than a year old at the time the report goes out impair independence unless safeguards bring the threat down to an acceptable level.²

Practical safeguards include an independent reviewer examining the attest work, partial payment that reduces the outstanding balance to an insignificant level, or a written payment commitment before the report issues. When no safeguard works, the CPA has to collect the money or decline to issue the report. The attest fee itself must also be set on its own merits; discounting it to win or keep a consulting engagement with the same client impairs independence.²

Can a CPA Hold Your Records for Unpaid Fees

Few billing disputes get more heated than whether a CPA can hold a client’s documents until the bill is paid. The AICPA Code draws clear lines depending on the type of record.²

Client-provided records — documents the client originally handed over, like receipts, W-2s, bank statements, and general ledgers — must be returned on request. The CPA may charge a reasonable fee for retrieval, copying, and shipping, but cannot withhold the records if that fee goes unpaid.
Member-prepared records, such as supporting schedules and adjusting entries the CPA created that are not in the client’s own books, may be withheld if fees are due for the specific work those records support.
Work products like a completed tax return may also be withheld when the client has not paid for that specific deliverable.
Working papers such as audit programs and analytical schedules belong to the CPA, and the client generally has no right to them.

The key is ownership. Records that belong to the client cannot be used as leverage for payment, no matter how large the unpaid bill. Records the CPA created for a specific engagement can be held until that engagement is paid for, but not as leverage for unrelated debts. Some state boards go further and prohibit withholding any records regardless of unpaid fees, and failing to follow the stricter state rule is itself an AICPA Code violation.²

Client Funds and Trust Accounts

When a CPA receives client money — an advance retainer, funds held for a real estate closing, or tax payments waiting to be remitted — those funds must be kept completely separate from the firm’s operating accounts. Commingling is one of the most serious ethical violations a CPA can commit.²

Client funds have to be held in a dedicated trust or escrow account. The CPA takes on fiduciary responsibility the moment the funds arrive. Every deposit and withdrawal must be recorded with date, amount, source, and purpose. Monthly reconciliation against bank statements is expected, and any discrepancy must be investigated and resolved immediately.

Once the reason for holding the funds is fulfilled, the money has to be sent promptly where it belongs. Tax payments collected from a client need to reach the IRS or state authority by the due date, not sit in the trust account earning float for the firm. Using client funds for any firm purpose, even temporarily, exposes the CPA to the most severe discipline available.

What Belongs in the Engagement Letter

A written engagement letter is the foundation of the CPA-client relationship. Professional standards require one for audits and reviews before work begins, and many state boards require one for every engagement.

A workable letter covers the specific services being performed, the responsibilities of both the CPA and the client, the fee structure and how fees are calculated, the invoicing schedule, consequences of nonpayment, the conditions under which either party can terminate, and procedures for resolving fee disputes. Specificity about scope is what keeps misunderstandings and scope creep from turning into billing fights later.

For tax engagements, the letter should address the CPA’s obligations under Circular 230, which governs practice before the IRS.⁴ Both parties should sign before work begins. State boards typically require engagement letters and billing records to be retained for three to seven years.

1
eCFR. 31 CFR 10.27 – Fees
2
American Institute of Certified Public Accountants. AICPA Code of Professional Conduct
3
Federal Register. Regulations Governing Practice Before the Internal Revenue Service
4
Internal Revenue Service. Office of Professional Responsibility and Circular 230