5 Tips to Reduce the Risk of an R&D Tax Audit
A common misbelief surrounding the R&D tax credit in Texas is that only large corporations qualify and that it’s too complex to apply for. Indeed, when it comes to claiming the R&D tax credit, far too often business sow the seeds of self-censorship.
In addition, 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. With this in mind, we’ve outlined five tips to assist companies in reducing their audit risk.
1. Ensure your Activities Qualify as Research
Firstly, firms must be able to describe scientifically why this is a genuine experiment whose outcomes you were testing in good faith. IRS has a four-part test to confirm whether the activities undertaken are eligible as “qualified research.” 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?
2. Keep Detailed Documentation
The documentation required by the IRS to support claims for the R&D tax credit is very detailed. It is the company’s responsibility to provide evidence that they are entitled to the credits. Unfortunately, many companies find the rigorous level of documentary requirements difficult to comprehend and sustain.
This is why it is key to have a team of people with the technical expertise required who know exactly what is needed and how to get it. Having an intimate knowledge of the legislation and law around the subject of R&D taxation is vital for companies in Texas. Providing the IRS with the right information and guaranteeing that companies receive the tax credits to which they are entitled is of high importance.
3. Double Check Documentation and Information Provided to the IRS
Companies rely on the R&D tax credit payments as part of their ongoing strategy and to provide financial support for projects. Losing such tax credits is not an option for many companies. This is why it is important to ensure that the documentation and information provided to the IRS is as comprehensive and supportive to a claim as possible. 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.
There is not enough knowledgeable resources within many companies to reliably understand the high level documentation that is required and therefore claims become burdensome. Providing the IRS with documentation which is either incorrect or insufficient results in lost claims and the loss of important finances.
4. Understand the Audit Process
The Audit Techniques Guides are distributed by the IRS to train IRS employees, however are obtainable to the public to aid a better understanding of the audit procedure. There is a broad variety of guides, each one personalized to a particular 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 browsing one will help prepare you for what to expect.
5. Seek Expertise and Support
As well as providing advice and support with the original R&D claim, it is important to know that the tax credits be sustained. The knowledge and experience of a specialist team means that advice can be provided about how to keep documentation at a level which means that any future audits and reviews are simple and efficient.
Any legal or taxation matters that arise from claims can be professionally taken care of with little need to interrupt a company’s normal business work-flow. The knowledge that this support is always there in turn provides companies with the confidence that their project budgets and finances are being maintained.
If you would like more information on State and Federal R&D Tax Credits, please contact Texas Tax Credit today.