Six Tips to Reduce Your Audit Risk with an R&D Tax Credit Claim
New rules and regulations have made it easier for all types of businesses to profit from the R&D Tax Credit, but there is always a possibility that the credit will provoke an IRS audit. Even hearing the word audit can spur risk aversion in clients, therefore it’s best to be prepared as possible to ease your mind.
To elaborate, an R&D tax credit audit is an examination of compliance with the relevant R&D tax credit legislation, and it consists of a thorough review of the claim from both a scientific/technological and a financial/tax technical perspective.
In light of this, we’ve collated six key tips to assist companies in reducing their audit risk.
1. Recognize what qualifies as research
To start with, you need to confirm whether the activities undertaken are eligible as “qualified research.” IRS has a four-part test for this, the four parts to consider are:
- Is your research technological in nature?
- Does the research have a permitted purpose?
- Are you working toward the elimination of uncertainty about a product?
- Are you engaged in the process of experimentation?
Ultimately, you must be able to explain scientifically why this is an authentic experiment whose outcomes you were testing in good faith. Firms should especially watch out for “R&D” that is actually just standard practice.
2. Collect and organize your documentation
Documentation is the basis of the R&D Tax Credit, so having your records organized and readily available is essential. Appoint a staff member who has access to the documents to collect the data throughout the R&D project. That way one person will be responsible for having everything in once place in case an audit occurs. Read up on what documents are needed to claim.
3. Get familiar with the Audit Techniques Guides
The Audit Techniques Guides are published by the IRS to train IRS employees, but are available to the public to help provide a better understanding of the audit process. There is a large assortment of guides, each one tailored to a specific audit concern. There are four different ones for the R&D Tax Credit alone that can be found on the Research Credit page of the IRS website. Be aware that some guides are industry specific so make sure to choose the one tailored to your business. Even skimming one will help prepare you for what to expect.
4. Reinforce high deductions with proof
One of the biggest triggers for a tax audit is having high deductions compared to other taxpayers within your same tax bracket. You can account for high deductions by attaching a receipt or other documentation to your tax return. While above average deductions can trigger an audit, being proactive and providing proof will reduce your chances of being audited. Don’t be afraid to deduct expenses that are legally deductible. Instead, make sure you can justify the amount of your deduction. Write checks whenever possible and keep a copy of the cancelled check in your records.
5. Double check your maths
Addition and subtraction errors are common reasons for tax audits. They’re also easy to fix and avoid. Check and double check your numbers to make sure you’ve included the right ones.
6. Consult a specialist
Getting advice from your tax preparer is always a good thing, but the R&D Tax Credit may be outside of their normal practice. If you do claim the credit it will be beneficial to consult with an R&D Tax Credit specialist. They will help determine your eligibility, properly prepare your claim up to IRS standards and provide guidance in the case of an audit.
Swanson Reed is familiar with the review process and knows what the government expectation is in terms of technical supporting documentation. Therefore, we can manage expectations in order to take the pressure and stress out of the equation. For more details on this service, visit our Audit Advisory page.
