Determining How Much to Pay in Tax Resolution Referral Fees

Today, we’re going to address the next most common question that I get whenever I start talking about this process of obtaining tax resolution referrals from other tax professionals.

I am fully aware that the issue of referral fees can be a contentious one. I anticipate no less than two dozen replies to this email slamming me for suggesting that we pay referral fees.

But I’ll say it loud and proud: If you’re able, I encourage you to pay referral fees.

While I would like to say that we live in a world where we could all do each other professional favors, and they will boomerang back in kind, the reality is that it’s very difficult to do. Many times, referrals are not returned in kind, nor are all they all able to be.

Think about it this way. One tax resolution referral to you is worth thousands of dollars. If you are a resolution-only practitioner, it’s impractical for you to try referring back to every one of your tax professional referral partners an equal revenue volume of tax prep work — you’re simply not going to have the volume.

So instead of quid pro quo (hmm, maybe I should avoid that phrase these days)…. So instead of trading favors, it’s easier to simply trade dollars. Money is, after all, a medium of exchange and a method of keeping score. Thus, we might as well use it.

To paraphrase a popular saying, “Money talks, favors walk.”

With that said, the next obvious question is: What is a reasonable referral fee to pay?

As a marketing person, I view this from a very practical standpoint. Let me explain.

If I engage in a direct mail campaign, telemarketing follow up, a pay per click ad campaign online, buy advertising in a niche trade journal, etc., my objective is to get back 3x what I invested in the marketing campaign. That’s gross receipts, and please note this applies to IRS Collections cases only, not tax prep, bookkeeping or other services.

In other words, I’m willing to invest $1,000 in order to get back $3,000. That math works for me, and it should work for you, too. If that math doesn’t work for you, then you need to reevaluate your expectations about ROI on marketing expenditure through traditional media (this is part of the beauty of referrals, public speaking, etc. — much lower cost of client acquisition).

In actual practice, I know that, depending on the media used, I will spend approximately $500 to $1200 to acquire a tax resolution client. This is typically closer to 4x or 5x ROI, so I’m happy with that.

Now, stay with me. This is where I tend to lose most tax professionals that, quite frankly, just want to be cheap.

If I know that I’m going to spend $1,000 to acquire a client through traditional media, doesn’t it make sense that I should be willing to pay the same amount of money as a referral fee?

Yes, yes it does.

If my expectation on other forms of lead generation is a 3x to 5x ROI, I need to be willing to invest the same thing into referral fees. This infers that a 20% to 33% referral fee is an acceptable range.

Again, many tax professionals will come back at me and say that’s too much. They’ll only want to pay $100 or $200. To this, I say, “Don’t be a cheapskate, cuz that’s exactly what you’re being.

Your referral partners are doing the heavy lifting for you. They are doing the single most difficult part of running a business, which is finding the clients. You should be willing — eager, even — to financially compensate them for this, and do so handsomely.

For what it’s worth, I historically paid a 30% referral fee to other tax professionals, and I paid it without hesitation.

A brief side note for the attorneys: I know that this is an issue for you. I have heard of some “creative” ways of getting around bar limitations on payment of referral fees to non-attorneys, but I’m not going to delve into that particular sticky wicket here.

If you’re ready to increase your referral business, particularly from other tax professionals, now is the time to pick up my Tax Resolution Referral Marketing Toolkit. You can pick it up here: