Tier I Issue – what does that mean?
On April 1, 2007, the IRS’s Large and Mid-Size Business Division (LMSB) published a new section 4.51.6 of the Internal Revenue Manual (IRM) – called the Issue Management Process Guide (click here for a link to it on the IRS website). This IRM section provides an overview of the Tier Issue Focus (TIF) Program, and outlines a “triage” process for identifying significant tax compliance issues.
At least annually, the IRS evaluates issues received from the field to determine their priority based on their current and/or potential non-compliance risks. The Industry Director then classifies each significant issue into one of three tiers, as follows:
Tier I – High Strategic Importance
Tier II – Significant Compliance Risk
Tier III – Industry Risk.
The R&D Tax Credit is listed as a Tier I – High Risk Transaction, which means it’s of high strategic importance to LMSB and has significant impact on more than one industry. Although Tier I issues are not always treated as mandatory work, examiners are instructed to always consider Tier I issues as part of EVERY examination.
What that means to you is if you are audited for ANY reason, and if you claimed an R&D Tax Credit on that return, the auditor MUST evaluate your R&D Credit and consider opening it up for further examination. If that happens, solid contemporaneous documentation will be critical in defending your claim for the Research and Development Tax Credit.
