CPA Billing Ethics: Fees, Client Funds, and Engagement Letters

CPA billing ethics are set by the AICPA Code of Professional Conduct, with Circular 230 layered on top for anything involving the IRS. The rules cover how fees are set and disclosed, when contingent fees and commissions are allowed, how client money must be held, and whether records can be held back over an unpaid bill. Violations are enforced by state boards of accountancy and can lead to fines, mandatory continuing education, suspension, or loss of the CPA license.

Fees Must Be Reasonable and Disclosed Up Front

Every fee a CPA charges has to be reasonable under the circumstances. Circular 230 goes further and bans “unconscionable” fees for any tax work.¹ Neither rule sets a dollar cap. Reasonableness gets judged against the time and labor involved, the complexity of the work, the skill and specialization required, and the experience of the CPA doing it.

The client needs to know the basis for the fee before work starts. Hourly, fixed, or retainer — whichever it is, the payment terms, invoicing schedule, and late-payment policies should be spelled out in advance. A CPA who never communicates fee expectations can face an ethics complaint even when the amount charged is defensible.

Contingent Fees

A contingent fee depends on the outcome of the work. Charging a percentage of a client’s tax refund is the textbook example, and it is prohibited.

Under the AICPA Code, a CPA may not prepare an original or amended return, or file a refund claim, for a contingent fee. This applies whether or not the CPA also performs attest work for the client.² Separately, contingent fees of any kind are barred when the CPA or firm also performs attest services (audits, reviews, certain compilations, examinations of prospective financial information) for that client. The reasoning is straightforward: if pay depends on a financial outcome, the CPA’s opinion on those same financials can’t be trusted.

The AICPA carves out a narrow safe harbor. A fee is not treated as “contingent” when the CPA can show, at the time the arrangement is made, that a government agency will give the matter substantive consideration — representing a client in an IRS examination, for instance, or pursuing a private letter ruling.²

For IRS matters, Circular 230 lists four specific situations where a contingent fee is allowed:¹

Representing a client in an IRS examination or challenge of an original return.
An amended return or refund claim filed within 120 days of the client receiving written notice of an examination.
A refund claim where the only issue is whether the IRS properly calculated statutory interest or penalties.
Any judicial proceeding arising under the Internal Revenue Code.

Preparing an original return for a percentage of the refund is not on that list, and it violates both the AICPA Code and Circular 230. The Circular 230 definition of “contingent fee” is broad enough to sweep in indemnity agreements, guarantees, and rescission clauses where the practitioner effectively reimburses the client if a position is challenged.¹

Commissions and Referral Fees

A commission is compensation for recommending or selling a third party’s product to a client. A referral fee is compensation for steering a client to (or receiving a client from) another professional. The AICPA allows both, with safeguards.

Written disclosure is the biggest one. The CPA has to tell the client, in writing and before the transaction or referral happens, about the arrangement and how the compensation is calculated.² Boilerplate buried in an engagement letter won’t do it. The disclosure needs enough specifics that the client can judge whether the payment might be influencing the recommendation.

Commissions and referral fees are flatly prohibited when the CPA or firm also performs attest services for that client. The ban covers the whole period of the attest engagement and the period covered by the historical financial statements involved.² Accepting a commission from a product vendor and later signing on to audit the same client creates a violation from the earlier payment.

For tax or consulting-only clients, commissions and referral fees are fine so long as the written disclosure happens. State boards sometimes require a signed consent form rather than a simple letter, so the AICPA rule is the floor.

Withholding Records When a Client Hasn’t Paid

Whether a CPA can hold documents until a bill is paid depends on who owns the documents.²

Documents the client originally provided — receipts, W-2s, bank statements, general ledgers — must be returned on request. A reasonable retrieval, copying, and shipping fee can be charged, but the records themselves cannot be held hostage if that fee is unpaid.
Supporting schedules, adjusting entries, and other records the CPA created as part of the engagement, and that aren’t already in the client’s own books, may be withheld if fees for the specific work those records support remain unpaid.
Deliverables named in the engagement, like a completed tax return, may be withheld when the client hasn’t paid for that specific product.
Working papers — audit programs, analytical schedules, internal documents — belong to the CPA, and the client generally has no right to them.

Records that belong to the client cannot be leveraged for payment. Records the CPA created for a specific engagement can be held for payment on that engagement, but not to collect on unrelated bills. Some state boards go further and prohibit withholding any records regardless of unpaid fees, and failing to follow the stricter state rule is itself an AICPA Code violation.²

Client Funds and Trust Accounts

Any money a CPA receives on behalf of a client — an advance retainer, funds for a closing, tax payments waiting to be remitted — has to be kept completely separate from the firm’s operating accounts. Commingling is one of the most serious violations in the Code.²

Client funds go in a dedicated trust or escrow account. Every deposit and withdrawal has to be logged with the date, amount, source, and purpose, and the account should be reconciled against bank statements monthly, with any discrepancy investigated and resolved right away. Once the reason for holding the money is done, it needs to move promptly — tax payments to the IRS or state by the due date, not parked in the trust account earning float. Using client funds for any firm purpose, even briefly, invites the harshest discipline available.

Unpaid Fees Can Become an Independence Problem

When an attest client owes the CPA money, that balance is a financial interest in the client. The AICPA treats unpaid fees, unbilled work, and notes receivable as potential threats to objectivity.²

Two factors matter: how significant the balance is to the CPA, and how long it has been outstanding. If the amount is clearly insignificant and relates to services provided less than a year before the attest report is issued, there’s no independence problem. If the balance is significant and more than a year old when the report goes out, independence is impaired unless a safeguard brings the threat down.² Safeguards include an independent reviewer examining the attest work, obtaining partial payment to shrink the balance, or securing a written payment commitment before issuing the report. If none works, the CPA collects the money or declines to issue the report.

Engagement Letters

A written engagement letter is where all of this gets pinned down. Professional standards for audits and reviews require one before work begins, and many state boards require one for every engagement.

A useful letter names the specific services, spells out both sides’ responsibilities, states the fee structure and how it’s calculated, sets the invoicing schedule, covers the consequences of nonpayment, describes when either party can terminate, and lays out a process for resolving fee disputes. The tighter the scope description, the less room for later misunderstanding. For tax work, the letter should address the CPA’s obligations under Circular 230.³ Both parties sign before work starts, and the letter and billing records should be retained — state boards typically require three to seven years.

1
eCFR. 31 CFR 10.27 – Fees
2
American Institute of Certified Public Accountants. AICPA Code of Professional Conduct
3
Internal Revenue Service. Office of Professional Responsibility and Circular 230