Should I do a 3-year look-back study?
Titan has been fortunate over the last three years to be invited to support taxpayers who are currently in audit for their R&D Credit claims with limited or no nexus or contemporaneous documentation. We are often called on either during the audit process, or after the IRS disallowance letter is received. This visibility into the audit process nation-wide has been the foundation of Armor’s design, and Titan’s current approach to training manufacturers (and their CPAs) on how to build proper R&D Tax Credit claims.
We are also called on and asked,
“Can Armor be used in the process of completing a 3-year look-back study?”
The regulations allow a taxpayer to amend their tax returns up to three years after they originally file it. This is a procedure designed to provide a mechanism for taxpayers to”fix” any mistakes they may have had on their original returns. If you’ve never claimed the R&D Credit, you have the ability to go back and capture these benefits, reduce your calculated tax liability, and receive refunds for your overpayment of taxes (plus interest) in those years. If you’re considering a look-back study, here’s our recommendation, base on our visibility into current audits:
- Verify the date you filed your tax return three years ago. This will be the drop-dead date for reclaiming the Credit for that year. For instance, if you’re a calendar year-end corporation, your 2006 filing was due on 3/15/07. If you filed for the automatic extension, the due date was pushed to 9/15/07. Under the regs, you have until 9/15/10 to file a claim for refunds based on your R&D Credit activities conducted in 2006. Keep in mind, however, that if you actually filed the return on, say August 5, 2007, your drop-dead date for filing the amended return is 8/5/10. You want to be real sure of this date, so you don’t inadvertantly miss it and give up one third of your 3-year look-back benefit.
- Track your R&D activities in Armor, starting TODAY. If you document yor current projects for the next 30-60-90 days (assuming your deadline affords you that much time), you’ll have the following advantages over the “blind” approach:
- You and your organization will have a better understanding of the R&D regulations. That means you’ll identify more areas of your business that qualify for the Credit, and your claim will be that much more valuable.
- You’ll have actual data that you can use to more accurately estimate your look-back benefit, without wasting time guessing on an “order of magnitude” or a “modeled” estimate.
- You’ll have defensible nexus that shows how you execute your projects, in detail, and the resources you expend (i.e. costs) associated with that execution.
- We strongly recommend consulting with an R&D service provider. Whether it’s your CPA, another CPA firm that has R&D expertise, or a “boutique accounting firm” that specializes in R&D, their experience in preparing and supporting you through an audit is invaluable. If you’d like a recommendation for a service provider, call us–we know the best in the industry, and can point you in the right direction.
This is the best approach to the look-back study that we’ve seen across the country. In fact, we’re passionate about this approach even when talking with CPAs who call us because their clients are already being audited. During the audit process, if the taxpayer diligently tracks their current activities, they can produce Armor data for the auditor in support of their claim. Of course, it’s not the contemporaneous documentation the auditor is asking for from the audit period, but if job descriptions and project work-flows are similar, it’s powerful evidence that the taxpayer is actually doing R&D, and goes a long way in supporting the estimate of qualified research expenses used to make the claim on the tax return under audit.
Questions about this? Call us – that’s what we’re here for.
