Update on Commissions and Contingent Fees

by Joseph F. Scutellaro, CPA, CohnReznick LLP  – July 31, 2017
Update on Commissions and Contingent Fees

In every New Jersey Law & Ethics course I teach for the NJCPA, I ask if anyone in the audience has ever entered into a commission or contingent fee arrangement with a client. Surprisingly, the number is always very small. I believe this is due to the conservative nature of CPAs and the fact that up until the 1990s, commissions for the referral of a client to a third party were prohibited by the American Institute of CPAs Code of Professional Conduct (AICPA Code) and the New Jersey State Board of Accountancy (State Board). Even though it has been almost 30 years since these rules changed in New Jersey, there is still a healthy fear of commission and contingent fee arrangements among the state’s CPAs. Here are some recent changes and major issues to be aware of.

Prohibited Services

Any discussion of commissions and contingent fees must always start with prohibited fee arrangements. Prohibited services generally include an audited or reviewed financial statement and an examination of prospective financial information. However, there is a difference between what the State Board and the AICPA Code include as prohibited services. The State Board prohibits commissions and contingent fees even on a compiled financial statement accompanied by a report. Conversely, the AICPA Code allows a commission or contingent fee if you issue a financial statement accompanied by a compilation report. The AICPA now allows CPAs to prepare internal-use financial statements without an accompanying report; such financial statement preparation work should not prohibit a CPA from receiving a commission or contingent fee from such clients under either the AICPA Code or State Board regulations.

Both the State Board and the AICPA Code now prohibit accepting a contingent fee for the preparation of an original or amended tax return as well as a claim for a tax refund unless the CPA can demonstrate a reasonable expectation of substantial review of such returns by the taxing authority. Similarly, Treasury Circular 230 (Circ. 230) section 10.27 prohibits contingent fee arrangements in connection with any matter before the IRS, even if there is an expecta­tion of substantial review, except in connection with the IRS’s examination or claims related to the assessment of interest and penalties. However, in the Ridgley case, the court held that the Treasury lacked statutory authority to promulgate contingent fee restrictions on practitioners preparing and filing ordinary refund claims. Although this court ruling has broad implications for Circ. 230 and the Treasury’s ability to regulate tax preparers, including CPAs, it does not affect the State Board or AICPA Code’s prohibi­tion on contingent arrangements related to original or amended tax returns.

Commission Arrangement Considerations

When a CPA is considering a commission arrangement, there are two main consid­erations. First, there are specific disclosure requirements. Both the State Board and the AICPA require disclosure to the client of any commissions paid to the CPA for referring a product or service to such client. Such disclosure must be in writing contem­poraneously with or prior to the referral and should be signed and dated by the client. There is no specific requirement to disclose the amount or rate of the commission just the fact that the commission will be paid.

Second, the CPA must have the required credential and/or license to accept such commissions. This is especially true when it comes to commissions related to invest­ment advisors and insurance. There are both federal and New Jersey security and insurance regulations requiring specific licenses to give advice and receive a com­mission on the purchase of such products.

Related Parties

Another confusing aspect of accepting commissions for referring products to clients is when related parties are involved. State Board regulations do not address related-party issues when it comes to com­missions for referring products; however, the AICPA Code does, and, in the absence of State Board regulations, New Jersey CPAs can rely on the AICPA Code. AICPA Code section 1.520.030 allows a member’s spouse to receive a commission for refer­ring products to or from a client for whom the member performs a prohibited service, including attest financial statements, if both of these criteria are met:

  • The activities of the member’s spouse are separate from the member’s practice
  • The member is not significantly in­volved in the spouse’s activities

Also under AICPA Code section 1.520.050, a member may receive a commission for referring an investment advisory service to an owner, officer or employee of a client for whom the member performs a prohibited service. This includes an employee benefit plan that is sponsored by a client for whom the member performs a prohibited service, as long as the member does not provide such prohibited services directly for the employee benefit plans.

In all of these related-party situations, the CPA should also consider the conflict of interest interpretation under the integ­rity and objectivity rules in AICPA Code section 1.100.

If you are presented with a potential commission or contingent fee opportunity in your practice and are concerned about any of these rules, contact the AICPA Ethics Hotline at ethics@aicpa.org or 888-777-7077.

1 Ridgely, jr. v J. J. Lew, Dist. Ct D.C Civil action no. 1:12 cv-00565-CRC, 7/17/14

2 State Board Regulation 13:29-3.12 (f) 1) has always required such disclosure be in writing; however, AICPA Code 1.520.080.01 did not make the requirement for a written disclosure effective until January 31, 2017

Joseph F. Scutellaro

Joseph F. Scutellaro

Joseph F. Scutellaro, CPA, is a partner with CohnReznick LLP. He is vice chairperson of the NJ-CPA-PAC, a member of the Federal Taxation Interest Group, a former member of the Professional Conduct Committee and a New Jersey Law and Ethics program instructor.

Read more by Joseph F. Scutellaro:

This article appeared in the July/August 2017 issue of New Jersey CPA magazine. Read the full issue.