Contingent Fees and Tax Compliance

This paper examines the effects of banning contingent fees for tax return preparation services. It develops a principal-agent model in which a taxpayer contracts with a tax practitioner to attempt to resolve tax law uncertainty. The contract must induce the practitioner to do research and take the tax return reporting position that the taxpayer prefers. Analysis of the model shows that banning contingent fees raises the expected fee of the practitioner. The amount of the increase is increasing in the quality of the practitioner. Contrary to the conventional wisdom that holds that contingent fee arrangements will make practitioners more likely to take aggressive tax return positions, we find that practitioners are less likely to be aggressive when contingent fees are allowed