R&D Tax Credits: The Power of Credible Testimony
Understanding the legal standard for substantiating claims under IRS regulations.
01. Meaning & Context
Credible Testimony serves as a critical evidentiary bridge in the context of US R&D tax credit law (IRC § 41), specifically addressing situations where contemporaneous documentation is imperfect or incomplete. Grounded in the *Cohan* rule and reinforced by case law such as *Suder v. Commissioner* and *McFerrin v. United States*, credible testimony allows taxpayers to use oral or written accounts from qualified employees—such as engineers, scientists, or project leads—to substantiate the nexus between qualified research activities and claimed expenses. It is not merely an opinion; it is factual evidence provided by a witness who is "worthy of belief," capable of reconstructing timelines and technical challenges with sufficient specificity to permit a reasonable estimation of the credit.
02. Importance & Impact
The importance of credible testimony cannot be overstated in an IRS examination, as it often determines whether a claim survives or is disallowed entirely. While the IRS prefers "contemporaneous documentation" (like time tracking logs), the courts have acknowledged that R&D is often fluid and imperfectly documented. In this gap, credible testimony provides the narrative glue that binds isolated technical documents (commits, emails, test logs) to specific business components. However, its value is contingent on quality; vague estimates or broad generalizations are routinely rejected. To be effective, the testimony must demonstrate a direct technical connection (nexus) and be corroborated by whatever objective evidence exists, thereby shifting the burden of proof back to a reasonable basis.
The Credibility Analyzer
Testimony is not binary; it exists on a spectrum. Use the sliders below to adjust the characteristics of a witness's statement. See how these factors influence the "Audit Strength" (Area of the chart).
Adjust Witness Attributes
Detailed technical knowledge vs. general oversight.
Supported by emails/commits vs. standalone word.
Linking time directly to qualified projects.
Audit Defense Radar
Real-World Scenario: The Software Engineer
Click the buttons below to see the difference between "Vague" testimony (rejected by IRS) and "Credible" testimony (accepted).
Next Steps: How to Operationalize Credible Testimony
To further clarify and explain Credible Testimony for stronger audit defense, follow this structured workflow.
Conduct Structured Interviews
Move beyond simple surveys. Engage in contemporaneous oral interviews with SMEs (Subject Matter Experts). Record the "who, what, where, why" of the technical uncertainty faced.
Establish the Nexus
Force the testimony to reference specific documents. Even if logs are missing, an engineer can point to a Git Commit history or email thread to anchor their memory in reality.
Quantify with Logic
Avoid "flat" estimates (e.g., "50%"). Use the testimony to build a bottom-up reconstruction: "Project A took 3 weeks, Project B took 2 weeks." Logic beats round numbers.
The Strategic Function and Substantiation Threshold of Credible Testimony in R&D Tax Credit Litigation
I. Executive Summary: The Critical Role of Credible Testimony in R&D Substantiation
Credible testimony, within the framework of U.S. tax law substantiation under Internal Revenue Code (IRC) Section 6001 and the specific requirements for the Credit for Increasing Research Activities (IRC § 41), refers to reliable, sworn oral evidence provided by individuals possessing personal knowledge of the Qualified Research Activities (QRAs).1 This evidence serves as a crucial, albeit secondary, means of proof. While the primary expectation under Treasury Regulation Section 1.6001-1(a) is the maintenance of sufficient records 3, credible testimony is often accepted by courts to supplement or reasonably reconstruct facts when contemporaneous documentation is incomplete or non-existent, particularly if the records were lost or destroyed through circumstances beyond the taxpayer’s control.3 Crucially, for R&D claims, the allowance for estimation methods—which rely heavily on testimony—is generally constrained to circumstances where the sole issue is the exact amount paid or incurred, not the underlying technical eligibility of the activities themselves.2 The testimony must provide factual support for every assumption underlying the claimed estimates.2 Judicial assessment of credibility scrutinizes the witness’s plausibility, consistency with existing records, and their ability to accurately recall events, factors heavily examined during an IRS audit.4
The strategic importance of credible testimony is twofold: first, its necessity in quantifying Qualified Research Expenses (QREs), such as the allocation of employee wages, and second, its function in corroborating the essential technical narrative of qualification. R&D activities are often fluid and highly technical, making comprehensive, real-time documentation challenging, thus making reliable oral accounts from technical staff essential for bridging gaps in records.6 The most significant strategic implication of presenting credible testimony is its potential to engage IRC § 7491(a), where the introduction of sufficient credible evidence can shift the statutory burden of proof from the taxpayer (the petitioner) to the Commissioner (the respondent) during litigation.7 This shift profoundly changes the dynamics of a tax controversy. The utility of testimony in quantification is effectively illustrated by the case of Suder v. Commissioner. In Suder, the Tax Court accepted corroborated testimonial evidence from the technical leads to support a significant 75% allocation of a key employee’s wages to qualified research activities.9 This successful application confirms that when a project’s eligibility is established, testimony remains a powerful tool for substantiating the cost basis of the credit.
II. Regulatory and Judicial Foundations of R&D Substantiation
A. The Legal Standard of the Burden of Proof
Tax credits, including the R&D Credit under IRC § 41, are considered matters of legislative grace. Consequently, statutes granting tax credits are construed strictly against the taxpayer, who bears the burden of proving entitlement to the claimed amounts.11 In civil tax trials, the standard of proof required is generally the preponderance of the evidence, meaning the taxpayer must persuade the factfinder that the proposition is more likely than not (a greater than 50% chance) true.7
The foundational requirement for all deductions and credits rests on IRC § 6001, which mandates that taxpayers maintain records sufficient to substantiate claimed items.3 The failure to keep and present accurate records weighs heavily against the taxpayer’s attempts at proof.3 While a court may accept credible testimony when documentary evidence is insufficient, taxpayers cannot rely on judicial leniency, particularly for expenses governed by stringent documentation rules.12
B. The Distinction Between Primary Documentation and Secondary Testimony
In R&D tax controversy, the Service and the courts maintain a clear preference for contemporaneous documentation. Taxpayers are specifically required by Treasury Regulation Section 1.41-4(d) to “retain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit”.11 These records must demonstrate that the taxpayer engaged in a systematic process of experimentation to resolve a technical uncertainty.13
Credible testimony functions as secondary evidence, typically deployed for reasonable construction when primary records are involuntarily lost or destroyed.3 However, the Internal Revenue Service (IRS) Audit Technique Guides (ATGs) impose a specific and critical constraint unique to R&D claims: estimation methods, which are often supported by testimony, are permitted only in cases where the sole unresolved issue is the exact amount paid or incurred in the qualified research activity.2 The taxpayer must provide factual support for every assumption underlying these estimates.2
This legal environment establishes a high threshold where testimonial evidence is often structurally weak if primary documentation is absent. The IRS explicitly differentiates between a minor “inexactitude” and a systemic failure to document. The audit guidance mandates that the failure to maintain a proper system to capture relevant information cannot be an “inexactitude is of their own making”.2 This means that if a business fails to implement any systematic time-tracking or project documentation system for their technical staff, that systemic lack is interpreted as a deliberate failing or negligence. In such scenarios, any subsequent testimonial attempt to reconstruct the fundamental technical qualification elements (i.e., proving the existence of technical uncertainty or the process of experimentation) is inherently rendered non-credible because the documentation gap is deemed intentional, rather than accidental. Therefore, testimony in R&D is generally successful only when used to allocate costs that pertain to activities already proven to be qualified through some level of documentary evidence, not to create the basis for qualification post-facto.4
III. Assessing Credibility: Judicial and Regulatory Scrutiny Standards
A. The Legal Mandate for Personal Knowledge
The cornerstone of admissible testimony in the Tax Court is the requirement for personal knowledge, derived from Federal Rule of Evidence 602. A witness may testify to a matter only if sufficient evidence is introduced to support a finding that the witness has personal knowledge of that matter.1 For R&D claims, this means the witness must have direct, firsthand involvement with the research activities, technical challenges, or the personnel and time tracking systems in question. The IRS recognizes this in its audit guides, noting that credible oral testimony should come from “individuals with personal knowledge of the issues” and typically involves “a technical or supervisory person with specialized knowledge”.2
IRS examiners are specifically instructed to consider two major factors when evaluating the reliability of oral testimony: whether the witness actually performed the qualified research and how much time elapsed between the research and the testimony.4 The analysis reveals a significant vulnerability: R&D audits frequently occur three to four years after the tax year being examined. The IRS’s instruction to weigh the “time elapsed” 4 directly targets the temporal reliability of the witness’s memory under the standards of FRE 602.1 This systematic time lag creates a default legal weakness for testimonial evidence, making proactive documentation of those testimonial narratives a crucial strategic necessity to counteract this inevitable temporal attack.
B. Judicial Factors Determining Witness Reliability
Courts evaluate the reliability of testimonial evidence based on several established criteria 5:
- Plausibility: Whether the testimony is likely to be true given the known facts and general industry standards.
- Consistency: Whether the testimony aligns with other evidence, prior statements, and the internal documentation presented.5
- Defects in Perception or Bias: Whether the witness had the opportunity to see or hear the events and the ability to recall those events accurately.5
For R&D claims, the requirement for technical plausibility is acute. The court in Phoenix Design Group, Inc. v. Commissioner emphasized that general complexity or iterative design work does not equate to the necessary technical uncertainty required for qualification.14 A witness providing testimony that claims uncertainty over matters that are readily solvable through publicly available manuals or standard compliance protocols will find their testimony deemed inherently implausible and will be rejected, regardless of the witness’s character.9
Furthermore, successful testimonial defense is fundamentally a matter of proceduralized compliance. The taxpayer’s ability to use testimony effectively is measured by the degree to which that testimony corroborates the detailed administrative claim submitted to the IRS (often initially outlined on Form 6765).16 Testimony that seeks to clarify facts must align perfectly with the required project narrative previously submitted. If an individual’s oral account deviates from the formal description of activities, the court views the testimony as inconsistent, thereby undermining its credibility and exposing the taxpayer to factual challenges.
Table 1: Key Judicial and Regulatory Factors Determining Testimonial Credibility
| Factor | Description and Legal Basis | R&D Context Impact |
| Personal Knowledge | Witness must have firsthand knowledge of the matter (FRE 602).1 | Testimony from non-technical management or administrative staff regarding technical uncertainty is often rejected. |
| Time Elapsed | The length of time between the research activity and the testimony.4 | Testimony based on recall years after the research is heavily scrutinized; highly vulnerable to attack. |
| Consistency/Plausibility | Testimony must align with documentary evidence, project scope, and be inherently reasonable.5 | Inconsistent oral testimony regarding technical uncertainty is often fatal, leading to disallowance. |
| Corroboration | Testimony must be supported by other objective evidence (e.g., financial records, expert reports). | Testimony used for allocation (Suder) must be strongly corroborated; testimony used for qualification requires contemporaneous documentation. |
| Burden Shift Potential | Introduction of sufficient credible evidence triggers burden shift to IRS (IRC § 7491).7 | Meticulous, detailed, consistent testimony is required to transform a defensive position into an offensive litigation posture. |
IV. Case Law Analysis: The Dichotomy of Successful Quantification versus Failed Qualification
Judicial precedent clearly illustrates the boundaries governing the effective use of credible testimony in R&D credit controversies. Testimony proves most effective when it supports the financial quantification of an expense, but generally fails when used as a retrospective substitute for missing technical qualification documentation.
A. The Strategic Use of Testimony: Supporting Allocation (Suder v. Commissioner)
The Tax Court Memorandum in Suder v. Commissioner provides a compelling example of successful testimonial evidence in the context of R&D cost allocation.9 The case involved estimated allocations of qualified wages. The court ultimately sustained the taxpayer’s 75% allocation, relying significantly on “sufficient and credible documentary and testimonial evidence”.9 The evidence corroborated the time spent by the key employees on qualified activities that were otherwise documented as eligible research. Furthermore, the court found the taxpayer’s expert testimony on the reasonableness of Suder’s overall compensation to be credible and accepted the calculation.10
A key finding in Suder was the confirmation that a business does not need to “reinvent the wheel” for its activities to be eligible.9 Testimony was critical in establishing that the uncertainty requirement of IRC § 174 (Research and Experimental Expenditures) was satisfied even though the general goal was technically possible; the uncertainty lay in the specific method or appropriate design necessary to reach that goal.9 In this context, the technical staff’s oral accounts provided the necessary narrative detail to bridge the gap between financial records and the technical reality of the project, demonstrating that testimony, when strongly corroborated, is powerful for resolving quantification issues.
B. The Catastrophic Failure of Testimony: Attempting Post-Hoc Justification (Phoenix Design Group)
In sharp contrast, the ruling in Phoenix Design Group, Inc. v. Commissioner (T.C. Memo 2024-113) underscores the limitations of testimony. The Tax Court denied R&D credits because the taxpayer (an engineering and design firm) failed to demonstrate the key requirements of Section 41, specifically the presence of technical uncertainty and a systematic process of experimentation.14
The fatal flaw was the company’s reliance on oral testimony that proved inconsistent with contemporaneous design documents and project records.14 The court found that the taxpayer was attempting to use testimony to retrospectively assert the existence of technical uncertainty, which the documentation failed to support. The court reiterated that general complexity or routine activities, such as standard code compliance or aesthetic design, do not meet the statutory threshold for qualified research.14 Phoenix Design Group solidifies the judicial doctrine: testimony cannot retrospectively create eligibility where contemporaneous documentation is insufficient to establish the fundamental technical criteria required by Section 41.
Additional case law further reinforces this demand for structural documentation. In Little Sandy Coal Co., Inc. v. Commissioner, the credits were denied because the company failed to prove that at least 80% of their research followed a structured process of experimentation.13 Similarly, the denial of credits for the Hurley Dredge project in Trinity Industries, Inc. v. United States of America rested on the finding that the work was largely based on improving an existing design with only minor modifications, failing the experimental test.17 In both instances, testimony alone could not overcome the deficiency in documented structured methodology.
Table 2: Contrastive Analysis: Testimony Success vs. Failure in R&D Litigation
| Criteria | Successful Testimony (e.g., Suder) | Unsuccessful Testimony (e.g., Phoenix Design Group) |
| Primary Focus of Testimony | Quantification (supporting estimated QRE allocations/amounts).9 | Qualification (retrospectively establishing technical uncertainty and experimentation).14 |
| Documentation Status | Documentation present but insufficient for precise allocation; inexactitude not deliberate.3 | Documentation critically lacking in substantiating fundamental qualification criteria.14 |
| Corroboration Standard | Testimony corroborated by expert witnesses, general business financial records, and consistency with high-level roles.10 | Testimony inconsistent with lower-level, contemporaneous project/design notes.14 |
| Outcome | Claimed wage allocations sustained based on persuasive, corroborated witness accounts. | Credits fully disallowed due to inability to meet the four-part test, compounded by inconsistent testimony. |
V. The Evolving Compliance Landscape: Proceduralizing Credibility
A. The New Era of Upfront Substantiation (Post-IR-2021-203)
The standards for R&D substantiation have undergone a profound transformation, moving toward mandatory upfront documentation and specificity. IRS News Release IR-2021-203, effective for claims filed after January 10, 2022, established new prerequisites for R&D credit refund claims.16 The 2024 updates to Form 6765, Credit for Increasing Research Activities, formalize this shift, requiring a more narrative-driven compliance tool.16
The initial prerequisites demanded five essential elements, including detailed descriptions of research activities for each business component, and critically, the names of individuals who performed each activity and the information they sought to discover.16 While the IRS issued an update in June 2024 waiving the requirement to provide the names of individuals and the information sought at the time the refund claim is filed 16, this waiver is procedural, not substantive. The facts underlying these two temporarily waived elements must still be provided during the subsequent audit.16
This means the strategic vulnerability remains. The initial Form 6765 filing creates a legally binding narrative for the claim. Any testimonial evidence presented later must be meticulously aligned with this initial filing to avoid procedural and factual challenges. As demonstrated in Premier Tech, Inc. and the Harper decision, the IRS is focused on procedural objections when filings lack specificity.16 Although the taxpayers in these cases ultimately prevailed on specific procedural motions, the litigation highlighted the significant risk that a claim could be rejected if the narrative and supporting evidence—including future testimony—do not provide sufficient detail to apprise the Commissioner of the exact basis for the claim.16 Testimony is therefore no longer a tool of last resort, but a pre-planned component designed to corroborate the initial administrative claim narrative.
B. Strategic Alignment and Practitioner Due Diligence
Given the increased scrutiny, the proper preparation of testimonial evidence is essential for robust audit defense. Testimonial accounts must be captured and managed in alignment with the specific factual assertions made on Form 6765. The professional standards set forth in Treasury Circular No. 230 place a duty of due diligence on tax professionals.19 This necessitates ensuring that clients not only possess the necessary documentation but also have a prepared, reliable testimonial base that can withstand deep technical audit scrutiny.19
The use of contemporary technology solutions can significantly enhance the credibility of future testimony.20 Because the IRS is not compelled to accept either estimates or extrapolations when contemporaneous records are lacking 4, systems that streamline data collection and track qualified R&D expenses in real-time provide the objective corroboration necessary to support estimates derived from testimonial evidence, transforming soft facts into hard data points.
Table 3: The Impact of IRS Form 6765 Changes on Testimonial Strategy
| Element | Original IR-2021-203 Mandate (Pre-2024) | Current June 2024 Status | Strategic Implication for Testimony |
| Identification of Business Components | Required 16 | Required | Testimony must focus precisely on these components; deviation invalidates the claim. |
| Description of Research Activities | Required 16 | Required | Establishes the legally binding narrative; testimony must corroborate this written account precisely. |
| Names of Individuals Who Performed Activity | Required 16 | Temporarily Waived at Filing 16 | Internal documentation (interview memos) of these names is paramount to support future oral testimony. |
| Information Each Individual Sought to Discover | Required 16 | Temporarily Waived at Filing 16 | This technical narrative, required for credibility, must be captured internally before audit, mitigating temporal decay. |
VI. Conclusions and Recommendations for Clarity and Enhanced Future Use of Credible Testimony (Next Steps)
The analysis confirms that credible testimony occupies a constrained but indispensable role in R&D tax controversy, primarily serving to quantify costs already established as eligible and to provide corroboration where contemporaneous documents are non-existent. However, the IRS’s increasing procedural demands and judicial reliance on documentary consistency necessitate specific regulatory clarification regarding the acceptable use and preparation of testimonial evidence.
A. Definitive IRS Guidance on Corroboration and Quantification
The IRS should issue formal guidance—such as a Revenue Procedure—that establishes objective standards for the use of testimony, particularly regarding cost allocations. This guidance should formalize the operational distinction evident in Suder versus Phoenix Design Group, explicitly separating the use of testimony for quantifying QREs (where corroborated estimation is acceptable) from its use for qualifying activities (where it should be rejected without contemporaneous evidence).9 Establishing a formalized “Credible Testimony Safe Harbor” for quantification would reduce litigation risk for estimates.
Furthermore, the Service must define objective metrics for how examiners should weigh testimony when significant time has elapsed, moving beyond the vague instruction in the Audit Technique Guide (ATG) regarding temporal scrutiny.4 This guidance should define acceptable proxy metrics (e.g., project complexity indices, historical employee data) that, when supported by credible testimony, allow for the reasonable reconstruction of QREs.
B. Implementation of Model Audit Protocol Agreements for Testimony
To promote transparency and compliance, the IRS should formalize the suggestion found in its ATGs 2 into a widely disseminated Model Audit Protocol Agreement (MAPA) for R&D substantiation. This MAPA would allow taxpayers and the Service to agree on a standardized recordkeeping regime for future years, encompassing both documentary and testimonial requirements.
The MAPA should specifically mandate the creation and maintenance of standardized, dated Interview Memoranda or Certified Affidavits from key technical employees who possess personal knowledge of the qualified research.1 These testimonial documents should be created within a short window (e.g., 12 months) following the close of the tax year. Proactively documenting the testimonial narrative while memory is fresh effectively neutralizes the IRS’s most common attack strategy—temporal decay—by providing highly reliable secondary evidence before the inevitable multi-year audit lag occurs.4 This proactive capture also serves to integrate the concept of “ordinary business care and prudence” by demonstrating a good-faith effort to preserve the testimonial narrative of research activities.21
C. Practitioner Advocacy and Client Education
Tax practitioners must continue to advocate during the regulatory comment periods for Form 6765 20, pushing for final instructions that explicitly recognize and validate the use of properly executed internal testimonial documentation (such as dated interview memos) as evidence that satisfies the spirit of the upfront narrative requirements. Internally, clients must be educated that reliance on testimony is not a passive strategy; it requires the proactive creation of a testimonial record. Technical staff should be interviewed annually by the tax team to capture the four-part test narrative, ensuring that the documented recollections are consistent and aligned with the administrative claim, thereby avoiding the costly factual inconsistencies demonstrated in Phoenix Design Group.14
Are you eligible?
Why choose us?
Pass an Audit?
What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
Never miss a deadline again
Stay up to date on IRS processes
Discover R&D in your industry
R&D Tax Credit Preparation Services
Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.
If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.
R&D Tax Credit Audit Advisory Services
creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.
Our Fees
Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/
Choose your state
