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.
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:
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.
HOW TO BEGIN
If you would like to discuss the research tax credit further, contact Scott via email at email@example.com
Source: Swanson Reed
CPA + Partner at Why Blu