Does the R&D Tax Credit Guarantee an Audit?

We often hear concerns about audit risk, as many people have a notion that filing for the R&D credit might trigger an audit. With the permanent status of the federal R&D credit, we expect businesses to become more comfortable with preparing claims. The process revolves around the four-part test for eligibility. Unfortunately the comfort of preparing a claim is overshadowed by that fear of an audit. So let’s consider the facts.

Is the R&D Tax Credit an Inherent Red flag?

Let’s get it out of the way. Claiming the R&D credit can provoke an IRS audit. But it’s not a guarantee, in fact, the number of companies being audited has changed over recent years. As the tax court has successfully reviewed some big cases and built up a body of precedence, they have better defined the procedure for claiming credits. Nowadays, a well-documented credit can be claimed safely assuming your work qualifies.

What factors increase the chances of an audit?

There are two key factors to consider.

  • Size of credit claimed (dollar value) relative to
    • Size of company
    • Average credit requested in your industry
  • Timely filing of returns

Is an Audit a Death Sentence?

Okay maybe “death sentence” is too strong – but does an audit automatically deny your credits? The answer is No. But this is where the importance of documentation comes in. You need supporting documentation that you qualify for the credit (eg. a thorough narrative, test results, progress reports). Proof that supports the financial value you are claiming (eg. invoices, payments, staff time sheets etc). Even proof that you actually conducted the activities you claimed. 

Managing documentation is the real key to the claim. If you support your claims well, your chances of a successful outcome from an audit are much higher. 

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at or contact your usual Swanson Reed representative.

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