Stop Charging Clients a Percentage of What You Save Them

I found Ray half a million dollars in potential tax savings and quoted him $50,000 to implement it.

Ray owned a company that handled drainage and large-scale plumbing work for cities and municipalities. When we met him, he was paying a little over $1.5 million a year in taxes. He was a high-income earner who was already buying real estate as an investment. He just didn’t know how much tax savings that real estate could create.

His wife didn’t work in his business. She managed the real estate which meant she could claim real estate professional status on their return by meeting the material participation tests. Then we ran a cost segregation study on the properties he already owned to accelerate the depreciation. We put it into action and turned it into $500,000 in savings.

That’s 10 percent of the number. At the time, I thought that was the obvious way to charge. It’s the model a lot of firms are taught the moment they start doing planning work: find the savings, take a slice.

Ray had never worked with someone like me. Beyond filing and maybe some bookkeeping, he’d never paid a fee for tax work. When I shared mine, his reaction was, “Man, that’s huge.”

Ray didn’t call back for seven months.

When he finally did, he said, “David, my bill is going to be bigger, and I need to figure out what I want to do now.” He knew he’d be happy to pay once he saw the savings. But he wouldn’t see them until his return was filed. That was about 13 months away.

His biggest question was how to work with someone like me when he’d never done it before. So we walked him through our process, our system, and the opportunities we saw. Once we did that, everything changed for him. We settled on a fee in the five figures, based on the scope of that first engagement, and he’s renewed four years in a row.

He saved the money, bought more real estate, and retired a few years early.

The timing problem

Percentage-of-savings pricing looks logical on paper. Client saves money, so the fee is tied to the money saved, and the advisor is rewarded for finding more.

In practice it creates a timing mismatch that stalls engagements.

The client pays the fee in the fall. The strategy gets executed over the following months. The savings don’t appear on the return until the return is filed, roughly 13 months after the invoice. For 13 months the client has paid for something they can’t see yet and can’t easily explain to a spouse or business partner.

Some clients tolerate that. A lot of them stall, and I don’t blame them. When we charged a percentage, about 40 percent of the people we talked to didn’t move forward.

A percentage fee also anchors the entire relationship to one outcome. A big savings number makes the fee feel outrageous, however much work went into it. When the number is small, the firm eats the complexity. The advisor takes on all the risk of whether the strategy actually lands, and the client ends up negotiating over a percentage.

The rules aren’t settled

Before you build a fee around a percentage, look at the rules.

Circular 230 generally prohibits a practitioner from charging a contingent fee for services rendered in connection with a matter before the IRS, and the definition of a contingent fee expressly includes a fee based on a percentage of the taxes saved. There are exceptions, including certain examination matters, claims for statutory interest or penalties, and judicial proceedings.

That prohibition was narrowed in court. In Ridgely v. Lew, the U.S. District Court for the District of Columbia held in 2014 that the IRS lacked statutory authority to enforce the contingent fee restrictions against practitioners for ordinary refund claims, on the reasoning that such work performed before any audit or adversarial proceeding isn’t practice before the IRS.

The IRS hasn’t abandoned the position, and the regulation remains on the books. CPAs also face their own ethics rules, which are separate from Circular 230 and generally restrict contingent fees for preparing original or amended returns and claims for refund.

Don’t treat this as settled. If you’re considering a fee tied to results, get a current read on Circular 230, your state board, and your professional body before you sign the engagement letter, and document the reasoning.

Don’t hand off the return

Percentage pricing usually comes with a second mistake. The firm sells the plan, then hands the client off to file the return somewhere else.

Ray’s returns are the example. The person preparing them before us wasn’t looking at the tax strategy. They were just trying to file the returns. We had to go back and amend them to get the strategy to actually work for him.

When that happens and the savings don’t show up, the client blames the strategy, which means you.

The return is where you find out whether the plan actually got carried out. If you’re responsible for the strategy, you need to be responsible for the filing, too.

What I charge now

In 2022, I stopped charging a percentage of the savings. It just didn’t make sense. I felt we should do a good job, period.

Now it’s one flat annual fee, and clients typically invest five figures or more. It includes quarterly check-ins across the year, carrying out the agreed strategy, preparing and filing the returns, and standing behind the client if the return is examined.

The client knows what the year costs on the day we start. I don’t have to renegotiate when the work turns out to be harder than it looked, and I don’t have to justify a number that only exists because a projection said so.

It also changed what clients ask about. Now they want confidence that we know what we’re doing, clarity on what’s going to happen, certainty that they’ll get the result, and value, meaning the savings are worth more than what they paid us.

If you’re still charging a slice of the savings, look at your last few engagements. Count how long each client waited between paying you and seeing a result. That wait is probably what’s costing you deals.

ABOUT THE AUTHOR:

David A. Perez, EA, is a tax strategist, the founder and CEO of Tax Maverick, and a best-selling author. He entered the tax profession in 2008 and has overseen more than 50,000 tax returns. He has led a tax advisory practice and now works with tax professionals building advisory-first firms.

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