In 2009-2010, the IRS disallowed R&D Tax Credit claims with statements like these:
“It is not enough to engage in qualified research activities to be entitled to the research credit. Taxpayers claiming the credit must maintain sufficient records detailing and substantiating the expenditures claimed as eligible for the credit.”
and:
“The Taxpayer, under its own admission, is unable to provide any records showing how many hours each employee worked on any given project during the credit year. Nor are they able to provide any records showing how many hours any employee’s work involved activities that might have constituted qualified research.”
Titan Armor helps CPAs and their clients who are being denied their R&D Tax Credit under IRS or State Agency audit.
Here are the three main arguments examiners use when denying an R&D Tax Credit:
1) Taxpayer has failed to meet the expenditures requirement under IRC Section 41(b).
So your Research Credit is based on the survey and/or interview method, right? Although standard and acceptable procedure during GEN 2, this is a dangerous approach today. The solution: Start building contemporaneous nexus NOW, while in audit, and use this period’s data to corroborate your allocation estimates. We can give you the case law that support this approach.
2) Taxpayer has failed to meet the technical activities requirement under IRC Section 41(d).
There are many arguments the auditor can make when taking the position that the taxpayer is not conducting qualified research. Here are a few of the common issues:
- Failure to meet any one of the 4-Part Test requirements.
- Failure to meet the High-Threshold-of-Innovation Test (internal use software).
- The activities are statutorily excluded (i.e. adaptation, funded research, etc.)
The only way to address this is to dig into the project details. This doesn’t have to be time-consuming or expensive. Let us show you an efficient way to get this done, while in the heat of the audit.
3) Taxpayer has failed to substantiate its qualified research activities and expenditures in the base years, in accordance with IRC Section 41(c).
A combination of the first two issues, base period arguments can be extremely challenging, depending on the taxpayer’s computation method. Current case law helps, but beware of the pitfalls that can undermine your defense.
We can help – call us for a free consultation.
Since the onset of the Tier I audit procedures, Titan has been involved in more IRS and State Agency audits than anyone we know. Here’s what we give to CPAs, at no cost, obligation, or client disclosure:
- Strategy recommendations, based on how far into the audit process you currently are.
- Best practices/arguments for every auditor dis-allowance position we’ve ever seen.
- Access to current case law and/or our tax attorney network of lawyers with current R&D Audit experience.
- A cost-benefit analysis of possibly next steps, including Appeals, Post-Appeal Arbitration, and Litigation.
Call us today, and leverage our audit experience to significantly improve your client’s probability of success.
