Revenue Share - Client Referals

I have a friend and colleague who is giving up his practice, for multiple reasons (including health). He's an EA, I'm a CPA.

He wants me to be one of two local preparers that he sends out to his list of clients in a letter explaining his situation. He would like a one time 30% referral fee of whatever I charge for their 2023 returns. Most of their returns are fairly easy and will help me afford my new admin staff person (currently a solo practitioner, no admin people).

I asked my attorney if he would review the fairly simple agreement that basically states I will pay him the 30% fee for any 2022 returns, that's it, by May 31st, 2023. My attorney said that lawyers aren't allowed to do this, so my question is, is there any ethics violations for CPA's to do this?

Thanks!

I have a friend and colleague who is giving up his practice, for multiple reasons (including health). He's an EA, I'm a CPA.

He wants me to be one of two local preparers that he sends out to his list of clients in a letter explaining his situation. He would like a one time 30% referral fee of whatever I charge for their 2023 returns. Most of their returns are fairly easy and will help me afford my new admin staff person (currently a solo practitioner, no admin people).

I asked my attorney if he would review the fairly simple agreement that basically states I will pay him the 30% fee for any 2022 returns, that's it, by May 31st, 2023. My attorney said that lawyers aren't allowed to do this, so my question is, is there any ethics violations for CPA's to do this?

Thanks!

I've done this many times.... perhaps there is a disclosure required but I never did. Small potatoes. You're paying him to review the return, questions, etc. I didn't even use a lawyer. If you can't trust the person, the paper aint worth a dime. Im sure a couple of "detail oriented" will disagree.

Hang on a minute. Will you be doing all the work? If so, why is this not a sale of a block of clients? Either they come to you or they don't. If they don't, you pay nothing. If they do, you fork over 30% of billings.

Methinks either your attorney has misunderstood things or I have.

You're paying him to review the return, questions, etc.

I'm paying him for the referral if I do the work. He will not have anything to do with the process except for saying go to Warnick CPA and sending me copies of their prior returns, and if something that carries over to this year I need help figuring out.

I didn't even use a lawyer. If you can't trust the person, the paper aint worth a dime. Im sure a couple of "detail oriented" will disagree.

It merely a formality. The agreement is 1 and a half pages that basically says I'll pay him his 30% for 2022 returns only. Notice response, amended returns, gift returns, etc. do not count, only originally submitted 2022 1040's.

Will you be doing all the work?/quote]

Yes

If so, why is this not a sale of a block of clients? Either they come to you or they don't. If they don't, you pay nothing. If they do, you fork over 30% of billings.

It's not a sale because there's another preparer (about an hour north) that will also be referred to his clients.


My attorney may have misunderstood. I just want to make sure that there's nothing against CPA policies to enter into this type of agreement. Simply put, he's not selling his business. He's sending his clients a letter saying to go to me, other preparer, or find their own. Any that come to me will get him a 30% revenue share for any 2022 returns I prepare.

I am willing to bet that an attorney with a flexible mind could draft something that will suit both parties and which does not appear to be a referral fee. Other than there being two succeeding preparers, the practical effect of this is like any other sale of a practice. Even if it were just you getting the clients, there is no guarantee that 100% of his clients would move to you.

His attorney already drafted something to affect of:

"Warnick CPA Services shall pay to xyz no later than May 30, 2023, thirty percent (30%) of the gross revenue that it receives from clients referred to it by xyz for federal, state and local income tax services, only, that Warnick CPA Services renders on behalf of these clients for tax year 2022 that file their tax returns by April 30, 2023. In addition, Warnick CPA Services shall also pay to xyz, no later than December 1, 2023, thirty percent (30%) of the gross revenue that it receives from clients referred to it by xyz for federal, state and local income tax services, only, that Warnick CPA Services renders on behalf of these clients for tax year 2022 that file their tax returns after April 30, 2023. "

The other page of stuff basically just says this is the entire agrement and that he will be sending me a list of his clients. Is this not an acceptable thing for CPA's to enter into?

It sounds to me like the other guy might have some issues. I don't think he can send you a list of his clients without each person's permission.

It sounds like a good deal. When I bought my practice, standard sales price was 1 x gross. You'd be paying only 30% of gross. You probably won't have much client attrition because each person will have a choice and will be making an affirmative decision to choose you.

As for referral fees...I don't remember. Are we allowed to do that? What does Circ 230 say? You'd be paying the fees, not receiving them, so I think that old guy is at greater risk. Overall, as stated above, it essentially is a sale of a practice.

I tend to want to be very careful with this sort of thing, though. I would tell old guy that you are all in, but you want your attorney to take a look. Then find a different attorney who will do the little bit of research and either provide you with the comfort that this is ok or provide suggested wording that complies with the law and gets you to the same place.

AICPA rule 503:

C. Referral fees

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.

I'm not in the AICPA and neither is the other individual, so that rules says "any member". So if neither one of of us are members I wonder if we can pass on the discloser.

Does your state board have a similar rule that you will have to navigate around?

You're paying the fee, not receiving it
There's nothing for you to disclose or be concerned about.
The other guy, maybe, but that's not your concern.

You're paying him to review the return, questions, etc.

I'm paying him for the referral if I do the work. He will not have anything to do with the process except for saying go to Warnick CPA and sending me copies of their prior returns, and if something that carries over to this year I need help figuring out.

.e.

Yes I get it, I am simply giving you an avenue to avoid a referral/payment disclosure.

Ohio Board of Accountancy stated that the fee has to be disclosed in the engagement letter, which no one will read anyways...

Ohio Board of Accountancy stated that the fee has to be disclosed in the engagement letter, which no one will read anyways...

So you have to state the fee in your engagement letter before the work is done and before you know what the fee will be? Interesting...

Ohio Board of Accountancy stated that the fee has to be disclosed in the engagement letter, which no one will read anyways...

So you have to state the fee in your engagement letter before the work is done and before you know what the fee will be? Interesting...

It's a flat 30%. The engagement letter will state something in the fine print about the return being referred to us by xyz and that there will be a 30% referral for their 2022 return.

You're paying the fee, not receiving it There's nothing for you to disclose or be concerned about. The other guy, maybe, but that's not your concern.

"pays a referral fee to obtain a client shall disclose such "
He's required to disclose.