The Business’ Guide to Decoding the R&D Tax-Credit Audit

Research and development (R&D) tax programs are valuable incentives to reward companies for investing in innovation. Businesses should know that filing for these credits – available at the federal and (sometimes) state levels – could offset significant qualified research expenses (QREs), including those associated with contract research, supplies, and wages.

Yet many companies remain intimidated by the possibility of being audited when deciding whether to file for the rewards they deserve for their cultivation of the American economy.

Understanding what to expect and partnering with the right expertise can help you confidently navigate any audit.

What Circumstances Trigger an Audit?

The Internal Revenue Service (IRS) has diverse reasons for selecting tax returns to audit:

• Data discrepancies: Errors or inconsistencies in your tax return may raise red flags.
• First-time claims: Initial claims may be more complex with specific eligibility requirements, warranting increased attention.
• Industry focus: The IRS may scrutinize particular industries during a given year.
• Random selection: Sometimes, it's a matter of chance.
• Related examinations: If another company under audit is related to a business, then it may also be audited.
• Significant credit amounts: Larger credit claims may warrant scrutiny.

What To Expect During an Audit

Understanding the typical steps of an audit may facilitate procedural compliance and thereby effect better outcomes.

• Notification: The IRS notifies the audited entity, most often by mail. This missive sets the audit scope and requests supporting documentation.
• Information gathering: Prepare to provide detailed records supporting your R&D tax credit claim. These articles may include:
  • Project documentation: Describe each qualifying project, its purpose, and the addressed technological uncertainties.
  • Financial records: Track all qualified research expenses (QREs).
  • Employee interviews: The IRS may interview key personnel involved in the research activities.

• Examination: The IRS will review your documentation and may conduct site visits to assess your research activities.

• Resolution: The audit arrives at the outcome. Possibilities include:
  • No change: The IRS accepts your claim as filed.
  • Agreed adjustments: The IRS and you agree on certain credit adjustments.
  • Disagreement: If you disagree with the IRS findings, then you may appeal them.

Best Practices for a Smoother Audit

• Maintain meticulous records. Careful documentation is crucial to substantiating claims.

• Document your methodology. Clearly explain how you identified and calculated QREs.

• Be organized and responsive. Present well-organized documentation, and respond promptly to the IRS’ requests.

• Consider professional assistance.

  • Acena Consulting can help you not only prepare your R&D claim, but also navigate audit proceedings.

  • We stand behind our work and – in the unlikely event of an audit – defend it at no additional charge.

  • Schedule a free consultation today to receive immediate assistance from Randy Eickhoff, CPA, Founder & Head Coach at Acena.

Stay Informed

Still concerned about audits that may arise after claiming R&D tax credits?

• Register now to attend our Audit Defense seminar on April 22 hosted by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. 

Want to learn more about qualifying and documenting activities for R&D tax credits?

• Sign up for our free, monthly webinar on February 18: “Cracking the (Tax) Code for R&D.”

  • This workshop provides one CPE credit for professionals who are keeping up with continuing education.

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Edited by Laura Whittenburg, MSBME, Sr. Technical Writer at Acena Consulting. Photo courtesy of scanlime on Flickr.