Unconscionable fees, contingent traps and the ERC hangover

In recent years, inflated fees and aggressive employee retention credit (ERC) schemes have drawn IRS scrutiny, and tax pros are under the microscope. While most practitioners charge fair, transparent fees, ethics violations around pricing and contingency structures can sneak up subtly, especially when dealing with high-dollar credits, amended returns or crisis clients.

You're not alone if you've wondered what counts as an "unconscionable" fee or whether you can charge a percentage of an ERC refund. This post discusses the ethical limits, the ERC warning signs, and how to protect your practice.

What counts as "unconscionable"?

Circular 230 §10.27 prohibits practitioners from charging "an unconscionable fee in connection with any matter before the IRS."

While the IRS doesn't define a fixed dollar limit, the standard is based on facts and circumstances such as:

• The complexity of the work
• The time and expertise required
• Comparable industry pricing
• Whether the fee exploits distress, urgency or client vulnerability

Charging $15,000 for a basic ERC claim with no eligibility screening? That's likely unconscionable. Charging a modest premium for a rush job that requires hours of analysis and risk mitigation? It's likely justifiable if it's disclosed in writing and agreed upon in advance.

Be cautious with contingency fees

Contingent fees, where charges are based on the size of a refund or the outcome of a matter, are generally prohibited when preparing original tax returns.

However, Circular 230 allows certain exceptions:

• An amended return or claim for refund, where the contingency relates to the recovery
• Representation in an IRS examination or appeal
• When the IRS announces temporary exceptions (such as disaster relief periods)

Still, if you prepare amended payroll or income tax returns to claim the ERC or other credits, tread carefully. You must:

• Confirm the amended return qualifies under the exception.
• Avoid charging a percentage that inflates your incentive to cross ethical boundaries.
• Include written disclosures about how the fee is calculated.

The safest practice is to use flat fees or hourly billing with a clear engagement letter.

ERC fees under fire

The IRS has issued multiple warnings about aggressive ERC promoters and is now auditing hundreds of firms that filed questionable claims.

Signs of unethical ERC practices include:

• No client-side wage analysis
• One-size-fits-all qualifications ("every business qualifies")
• Fees based on a percentage of the credit
• No written engagement agreement or substantiation checklist

If you inherited ERC clients or are considering entering this space, the bar is high. Due diligence and ethics apply even after the refund check is cashed.

What if your client used a questionable ERC shop?

You may meet clients who received ERC funds via a third-party mill. Now, they're getting audit letters or IRS notices. You should:

• Review the original filing and wage records.
• Determine whether the claim was valid.
• Recommend an amended return if the credit was claimed improperly.
• Decline to represent if you believe fraud occurred and the client won't correct it.

You don't need to fix a prior preparer's bad work, but you cannot participate in misrepresentation. Ethics require you to document your findings and disengage if the client refuses to correct material errors.

Build ethical pricing into your practice structure

To stay compliant, establish and document a consistent pricing policy. That includes:

• How you determine fees (flat rate, hourly, complexity-based)
• What's included in the base fee
• When you may charge for extras like audit support, amended returns or rush filing
• When and how you use engagement letters to disclose pricing terms

Also, document when you offer refunds, discounts or service credits, and apply them fairly.

Example: Balancing fees and fairness

You take on an ERC review engagement. After reviewing payroll records and ownership structure, you determine the client does indeed qualify for 2021’s Q2 and Q3 credits. You charge a $1,500 flat fee per quarter, covering analysis, substantiation, amended payroll return prep and an audit defense letter.

The client gets $62,000 in credits. They're thrilled, and your pricing was transparent and documented. This is an ethical model: value-based, not exploitative.

Now, compare that to a 25% fee, or $15,500 for the same outcome, with no documentation or engagement letter. The second model likely crosses ethical and IRS red-flag lines.

Stay sharp and stay out of the headlines

Ethics isn't just about saying no to fraud. It's about pricing fairly, documenting your value, and refusing to compromise when tempted by high-dollar opportunities. The IRS is watching, and clients remember how you treated them when money was on the table. Protecting your reputation starts with consistent, ethical choices that keep you out of the headlines and in control of your practice.