Does claiming the R&D Tax Credit trigger an audit?

MARCH 17, 2021

12:00 AM

By Jennifer Bolton

Many business owners claiming the R&D Tax Credit are concerned about an audit. Here’s some great news: filing a research tax credit claim does not automatically trigger an IRS audit. The IRS annually audits federal tax returns filed by individuals, partnerships, corporations, and other entities to ascertain whether these taxpayers have complied with applicable federal revenue laws and paid the proper amount of tax.

What is the IRS’ selection criteria for an audit?

Selection for an audit does not always mean there is a problem or issue with a tax return. The IRS uses several different methods for selecting audits:

Random selection and computer screening

Sometimes returns are selected based solely on a statistical formula. The IRS compares your tax return against “norms” for similar returns. They develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.

Related examinations

The IRS may select returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.

Other factors

Although filing an amended return does not affect the selection process of the original return, amended returns typically go through a screening process before a refund is issued.  The screening process is not an audit, sometimes the IRS requests additional information regarding the refund request and other times, it is possible that the return could be selected for an audit depending on the overall size of the refund claim.  In addition, sometimes the IRS selects certain industries to audit.

What if my R&D Tax Credit claim is selected for an audit?

If selected for a research tax credit audit, it is important to be able to substantiate the amounts of the qualified research expenses with records and documents that demonstrate the nexus between the qualified activities performed and the amount of the credit claimed. In addition, a technical report that specifies the methodology of the credit claimed as well as provide a detail of how the activities meet the IRS qualifications for claiming the credit is essential in helping to sustain the credit amount.

Three reasons why it’s important to work with the right R&D Tax Credit specialist:

Here are 3 reasons why it’s important to select the right R&D Tax Credit Specialist:

1. You must present an accurate qualification of activities to avoid claim irregularities:

Given the technical nature of the R&D Tax Credit it is essential to work with a firm that has substantial experience in the sciences. Having a dedicated team of qualified tax and technical experts to help substantiate and support your claim by working with you and your technical team to properly qualify the activities and expenses related to your research and development.

2. You must substantiate your claim:

Having the proper documentation to validate a claim is crucial. R&D Tax Credit specialists at Leyton can help you support your claim with a detailed technical report that documents how your company’s R&D qualifies for the R&D Tax Credit.

3. In case of an audit, you must have qualified tax representatives:

Going through an IRS audit can be a long and painful process, that is why the right R&D Tax Credit Specialist will help represent your company in connection with an R&D challenge by the IRS. Leyton’s highly qualified tax representatives include tax attorneys with over 20 years of audit defense work who provide skilled assistance in case of an audit of your R&D Tax Credits.

The end goal:

While claiming the R&D Tax Credit does not automatically trigger an audit, it is a possibility. In case of an audit, having a comprehensive R&D report can serve as the primary evidence to support your claim in front of the IRS. Leyton’s team of CPAs, technical experts, and tax attorneys do all the heavy lifting to prepare this report, so that you can focus on your end goal: growing your business.


About Leyton:

Founded in 1997, Leyton is a global innovation funding consultancy dedicated to helping our clients improve their business performance. In the US, our specific expertise is in optimization of Federal and State Research & Development (R&D) Tax Credits. As a business, we want to help unleash our clients potential and be a strategic partner in their evolution and growth.


Author

Jennifer Bolton

Senior Tax Manager

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