d. The Mandatory IDR

If the IRS chooses to audit your Research and Development Tax Credit, they start the process by sending you an Information Document Request (IDR).  Today, the IDR for R&D Credit audits is standard, and is designed to help the Service separate poorly constructed claims from appropriately documented, defensible claims.

If you receive an IDR, here are the 17 questions (and their sub-parts) that the IRS will require you to respond to:

1. Have you retained a third party to assist you in preparing this claim?
2. Did you make a §280C(c)(3) election on your original tax return?
3. Are you required by §IRC 41(f)(1) to aggregate your research expenditures with other members of the same controlled group or other trades or businesses which are under common control?
4. In computing the group credit for the year, which includes computations of the base amount, have you accounted for all acquisitions and dispositions of members of the controlled group, or trades or businesses which are under common control, in accordance with the aggregation rules of I.R.C. §41(f)(1)?  If no, explain why you have not accounted for all acquisitions and dispositions.
5. In computing the credit for the credit year, which includes computation of the base amount, have you accounted for all acquisitions or dispositions of a major portion of a trade or business or major portion of a separate unit of a trade or business as required by I.R.C. §41(f)(3)(A) or §41(f)(3)(B)?
6. Did you use project accounting to capture costs in your financial books and records?
7. When computing taxable income, did you report the additional QREs as “expenses” in compliance with your adopted method of accounting for research and experimental expenditures under I.R.C. §174?
8. Do you have contemporaneous documentation that:
   1. Identifies each new or improved business component for which the additional QREs are being claimed?
   2. Identifies qualified research by each new or improved business component?
   3. Identifies, by each new or improved business component, each employee whose wages are being claimed as QREs?
   4. Tracks, by each new or improved business component, the time spent by each employee performing qualified services?
   5. Identifies the general ledger accounts which were used to quantify the QRE supplies?
   6. Identifies the amount of QRE supplies consumed in the conduct of qualified research for each new or improved business component?
   7. Identify claimed contract research expenses by contractor, QRE amount and each new or improved business component?
9. Does the amount of additional QREs include any expenditures for overhead expenses, general and administrative expenses, indirect research expenditures or depreciation allowances?
10. Does the claim rely on any oral testimony or employee surveys to determine the additional QREs in the credit year?
11. Does the claim rely on any oral testimony or employee surveys to determine QREs in the base years?
12. Does the claim rely on estimates or extrapolations to determine any portion of the QREs in the credit year?
13. Does the claim rely on estimates or extrapolations to determine any portion of the QREs in the base years?
14. Does the claim rely on estimates or extrapolations to determine any portion of the gross receipts used to compute the base amount?
15. Was any form of sampling used to determine your QREs?
16. Have you compiled with the consistency requirement of I.R.C. §41(c)(6), which requires that the QREs used in determining the fixed-base percentage be determined on a basis consistent with the determination of the QREs for the credit year?
17. Provide the name(s) and phone number(s) of the person(s) who completed this questionnaire.

Titan Armor may not be able to answer every question on this IRS standard IDR for R&D tax credit audits, but it can make it easy for you to build rock-solid contemporaneous documentation and project accounting data to answer Questions 6 and 8 of this standard R&D Credit Audit IDR.  To see how, check out our web video series, The R&D Credit – What’s it All About?.