The Gorczynski Group LLC attended two of the IRS Nationwide Tax Forums this year: Chicago and San Diego. One of the advertised opportunities was that I am happy to accept case referrals for IRS and U.S. Tax Court representation engagements.
I was surprised when every single tax professional who asked about referrals demanded to know what referral fee they would earn for sending a client to me to handle a matter that the tax professional admitted they did not have the knowledge, experience, or license to handle themselves.
While I appreciate every referral I receive from a colleague, I refuse to pay referral fees because I believe there are ethical issues inherent in doing so.
Ethical Standards
Circular 230 does not address referral fees at all. §10.27 prohibits unconscionable fees and restricts contingent fees; nothing in prohibits referral fees or requires disclosure of referral fees.
The AICPA Code of Professional Conduct addresses referral fees directly. The Commissions and Referral Fees Rule (ET §1.520.001) prohibits commissions only for attest clients; referral fees between professionals are governed by paragraph .04:
Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.
The rule permits a CPA to pay or accept a referral fee, but the obligation runs in both directions: the CPA who pays to obtain the client must disclose the payment, and the CPA who accepts a fee for the recommendation must disclose it as well. Neither side of the transaction can be kept from the client.
The NAEA Code of Ethics and Rules of Professional Conduct takes the same approach for enrolled agents. Rule 12 states in part:
No Member or Associate will accept or pay a commission for the sale or referral of products or services to a client unless they are properly licensed and all facts are fully disclosed in writing to the client.
The U.S. Tax Court goes further. Tax Court Rule 201(a) requires practitioners before the Court to practice “in accordance with the letter and spirit of the Model Rules of Professional Conduct of the American Bar Association.” ABA Model Rule 7.2(b) provides that a lawyer “shall not compensate, give or promise anything of value to a person for recommending the lawyer’s services,” subject to narrow exceptions. A USTCP cannot pay a tax professional for a U.S. Tax Court engagement referral.
The standards that permit referral fees require written disclosure to the client, and the standard governing U.S. Tax Court practice prohibits them. Not one practitioner who asked me about a referral fee offered mentioned disclosing it to the client in writing.
Referrals and Competence
Circular 230 §10.35 requires a practitioner to “possess the necessary competence to engage in practice before the Internal Revenue Service.” A practitioner who lacks the knowledge, experience, or license for a federal tax matter has two options:
Gain competence through education and/or consultation, or
Decline the matter and refer the client to someone competent.
A referral often is the referring practitioner meeting their own ethical obligation. Demanding payment to meet an ethical obligation turns the relationship backward.
Taxpayer’s Best Interest Comes First
A referral fee changes the question the referring practitioner asks. Without one, the question is “who is best for this client?” With one, it is “who will pay me the most for this client?” They are not always the same person, and the client cannot tell which question was asked unless the fee is properly disclosed.
Here’s the truth: the client ultimately pays the referral fee because a practitioner who passes a portion of the engagement fee to the referring practitioner is pricing the referral fee into the engagement fee.
Eliminating the Scarcity Mindset
The referral fee demand comes from a scarcity mindset: a belief that any client walking out the door, even for a matter that cannot be handled by the practitioner, is lost revenue that must be recovered somehow. It is not.
A client referred to a competent professional for representation or advisory matters returns to the referring practitioner for tax return preparation, usually with a stronger relationship, because the practitioner solved a problem.
Referrals run in both directions. A practitioner who refers out matters beyond their expertise without expecting anything in return builds relationships with the professionals who receive those referrals, and those professionals send work back because the relationship rests on trust and competence, not on a ledger.
A referral made for the client's benefit is the best business development a tax professional can do, and it costs nothing.
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GREAT article and I 100% agree with all your points here. When I refer my clients to a Trust/Estate Attorney or to a Financial Advisor who I know will take good care of them, It is not with the expectation that I get anything in return other than more excellent service for my client. My clients truly understand that I am their Trusted Advisor. And my referral sources understand that I provide excellent service, so I am a safe place to refer THEIR clients. (applause, applause for this article!!)
Completely agree. Not only is it scarcity mentality but with all the hype and focus on passive income everyone wants to be paid and not do any work. I don't have any affiliate links and I don't take revenue share from software like QBO or gusto either. I want to look at a client and tell them the person or software I'm recommended is because I believe it's best for them and for them to have zero reason to question my recommendation or the motivation behind it.
When it's another professional, I feel like they're doing me a favor by taking the client. I certainly don't expect to be compensated when they're helping me out by covering an area for a client I don't or can't cover.