The Referral Fee
Ravi prepares tax returns. A financial advisor, Lena, refers clients to him and asks for a 15% commission on fees from any referred client. Ravi also has a client, Tom, whose return he prepares. Tom mentions he is about to sell a rental property and asks Ravi, 'since you know my numbers, would you also handle the sale and take a cut of the proceeds?' Ravi is not a licensed real estate broker. Separately, Ravi's own brother asks him to prepare his return and to 'leave off' a small consulting income of $4,000 because 'family shouldn't pay.'
1. Can Ravi accept the 15% commission from Lena?
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Generally no without careful analysis - a commission paid for client referrals creates a conflict of interest and, in many professional frameworks, is prohibited or must be disclosed with informed consent.
Reasoning:
- The referral fee incentivizes Ravi to recommend Lena's products or to accept clients based on the fee rather than client interest. That is a conflict of interest.
- If permitted at all, it requires written disclosure and the client's informed consent, and must not compromise objectivity.
- Best practice: decline the commission, or restructure as a flat, disclosed referral arrangement. Document the decision.
2. Can Ravi 'handle the sale and take a cut of the proceeds'?
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No. Two problems:
- Licensing. Ravi is not a licensed real estate broker; taking a cut of sale proceeds for handling the sale is likely unauthorized practice.
- Independence. A contingency fee tied to the sale proceeds compromises his objectivity on the tax reporting of that same transaction.
He can advise on the tax consequences of the sale as part of the return, but he should not act as broker or take a percentage of proceeds. Refer Tom to a licensed agent.
3. What should Ravi do about his brother's request to omit $4,000?
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He must not omit the income. Family relationship does not change the reporting obligation.
Options:
- Prepare the return correctly, including the $4,000.
- If the brother refuses, Ravi should decline to prepare the return rather than file a false one.
Document the conversation. Preparing a knowingly false return - even for a family member - exposes Ravi to preparer penalties and violates integrity. The 'family shouldn't pay' argument is not a legal basis.