Is the R&D Tax Credit a Tier 1 Issue?

2 Minute Read
Posted by Brad Mols on Jan 22, 2019 10:01:39 AM

Sometimes, keeping up with the ever-changing rules, regulations, and requirements of the research and development tax credit can feel like a perpetual game of "Good News/Bad News."

The Good News: Research and Development is Redefined

Over a decade ago, changes to the government's definition of "research and development" removed the discovery test qualification, instantly making the R&D tax credit available to small businesses in multiple industries across the U.S. The decidedly pro-taxpayer modifications to the innovation credit proved a game changer. Suddenly, business owners at the helm of these newly eligible organizations were able to file amended tax returns and reap significant retroactive R&D tax credits – and file they did.

The Bad News: R&D Tax Credit Designated a Tier 1 Issue

Before the regulatory modifications were implemented, the R&D tax credit primarily favored large businesses and organizations that were already well versed in the documentation requirements needed to file for refunds. However, as smaller businesses retroactively leveraged this newfound cash flow opportunity, the government realized not only was proper documentation of these harvested refunds scarce, so was the IRS's understanding of how to effectively audit these refund claims. As a result, the IRS officially elevated the research and development tax credit to a Tier 1 Issue in 2007. According to the IRS website, the Tiered Issue Process was designed to prevent taxpayers from abusing specific tax shelters, as well as outline specific, consistent documentation requirements. Under a Tier 1 designation, taxpayers filing for an innovation tax credit suddenly found themselves tasked with producing extensive documentation to prove compliance across every claim.

The Good News: IRS Does Away With Tiered Issue Process

In 2012, the IRS officially eliminated its entire Tiered Issue Process, effectively leveling the playing field for businesses of every size, scope, and industry once again. Currently, all issues during an audit are risk-assessed and examined in the same way to ensure consistency in process across every sector.

The Bad News: Documentation Still Poses a Major Challenge to R&D Tax Claim Compliance

Having the R&D tax credit lose its Tier 1 designation is a major win for taxpayers. However, even without the Tier 1 label, required documentation for research and development claims still pose a significant risk to entrepreneurs and financial professionals. The landscape of tax legislation can (and does) change often and without notice, increasing the chance for noncompliance in the event of an audit, particularly for taxpayers filing an amended tax return.

The Great News: Acena Consulting Offers Professional R&D Documentation Services

No matter how frequently or extensively the innovation tax credit changes and evolves, Acena Consulting can help. As a leader in the R&D tax credit vertical, Acena's team of professional tax advisors specialize in comprehensive documentation services to support every R&D tax claim and eliminate compliance gaps. Acena's systematic and thorough documentation solutions help qualifying organizations in every industry validate innovation claims to reduce operational risk and drive overall cash flow opportunity.

Tax season is officially here – is your R&D tax credit documentation in order? Contact Acena Consulting to schedule a no-risk consultation with a member of our team today.


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