Like many CPAs, you may have hesitated to advise your client to take the R&D tax credit. With so much press and conflicting information out there, you may believe that you would be advising him or her to do something that may put them in harms way, which is never smart. While new rules have made it easier for businesses of all sizes to benefit from their research expenses, there is still the possibility that this credit can trigger - or at least contribute to - an audit. If your client is being audited or you feel some degree of anxiety that your client will be audited in the future, you will want to be sure you are prepared. Here are a few ways that you can help your client prepare for an R&D tax credit audit and provide yourself with some peace of mind.
Study the Audit Techniques Guide
The IRS publishes a variety of Audit Techniques Guides (ATGs) that address specific audit concerns. These guides are designed to train and assist IRS employees, but they are also made available to the public so that they can have an understanding of the audit process. There are specific ATGs for the research tax credit available on the Research Credit page of the IRS site. Reviewing this documentation can help you know what to expect from an IRS audit. Be advised that there are different guides for different industries, including aerospace and pharmaceuticals, so be sure to choose the one that is most relevant to your client.
Collect and Organize Your Client's Documentation
In order to take advantage of the research credit, you will need to prove that your client has incurred qualified research expenses (QREs) during the tax period under audit. Of course, to prove this your client will need to document those expenses as they occur (or have a reasonable basis to validate their estimates). One of the best ways to ensure you have the right documentation is to make sure that each person involved in R&D is firmly attached to a specific project and that someone on that project (or everyone) is accountable for their hours and activities. While estimates may be allowed in some cases, having contemporaneous documentation is always the best approach.
Meet with a Specialist
As a CPA advising a small business owner, you are their trusted business adviser for their taxes. However, the research tax credit may indeed be beyond the scope of your regular practice. If you recommend to your client that they take this credit, it will be worth your while to consult with a specialist in R&D tax credits. They can work with you and your client to determine eligibility, or to help you prepare for an audit if necessary.
Review the Information Document Request with Your Specialist
If you have already been notified of an audit, you will have received what is known as an Information Document Request (IDR). A tax credit specialist will be able to complete this IDR in accordance with IRS rules and regulations. They will also be able to help you understand the audit process, from beginning to end, and to make it as easy as possible for you and your client.
Being subjected to a research tax credit audit can cause anxiety, but with the right preparation and assistance from experts, it can be an enlightening and painless process.