Will Filing for R&D Credits Increase My Audit Risk?

Will Filing for R&D Credits Increase My Audit Risk?

Posted by on 05.26.21

Now that federal legislation has made the federal research and development (R&D) tax credit permanent and extended it to more business entities, there has never been a better opportunity to receive valuable tax credits for the innovative and qualified activities your business conducts.

As a business owner, as long as you meet the IRS’ four-part test for eligibility, you may qualify for hundreds of thousands of dollars that you can use to further grow and invest in your business. Despite this lucrative opportunity, there is still one thing that holds some companies back—the fear of being audited. Understanding this concern, Tax Point Advisors provides the following answers to the question, “Will filing for R&D credits increase my chance of being audited?”

1. Will filing for R&D credits raise a red flag? 

While it is true that companies claiming the R&D credit can provoke an IRS audit, the number of companies being audited has changed in recent years due to much more clarity over what can be claimed and how to do it. Several court cases in recent years have helped to better define the procedure for claiming these credits in favor of the taxpayer. Today, a well-documented credit can be claimed safely on R&D work that meets the qualifications that will withstand audit.

2. What factors increase the chances of an audit? 

The dollar value of the credit you are asking for relative to your company size and the average credit requested in your industry can affect your chances. 

Timely filed returns have a lower probability of being flagged for an audit than amended returns. Still, that shouldn’t preclude businesses with well-documented claims from moving forward to claim tax credits for past years.

3. Will my tax credits be automatically denied if I am audited?

This is where the importance of thorough documentation comes into play. Your documentation must prove that you: 1) qualify for the credit; 2) have conducted the activities for which you are taking the credit; and 3) qualify for the financial amount you are requesting.

Less than 33% of companies that qualify for the federal R&D tax credit actually utilize it, due to misconceptions about qualification and the complexity of necessary documentation. 

4. Why is documentation so important?

How well your documentation is managed, and the amount of it you have to back up your claims, the greater your chances of success will be under an IRS audit. It is essential that the taxpayer maintain an acceptable method to keep documentation, including financial information and project information, to prove the credits being claimed. While there are helpful accounting software programs that keep records by each project, you stand the greatest chance for success with the guidance of an R&D tax credit professional. Many businesses find it necessary to bring in specialty tax credit service providers as they can navigate your existing record keeping standards and offer suggestions on the most appropriate methodology to fully back-up an R&D Tax credit claim.

Industry-Leading Audit Representation

Tax Point Advisors provides CPA firms and their clients with federal and state R&D tax credit audit representation. With industry-leading audit success, our team of engineers, CPAs and tax attorneys provide strategic direction and high-quality legal representation with the proven ability to back tax credit claims.

See related blog: What to Look for in R&D Tax Credit Audit Representation

Our audit rate is under 5% and our industry-leading audit success is unmatched.

We help our clients prepare for tax credit filings with highly detailed documentation that is needed to survive an audit. We have never had a credit lost under audit because our team of experts work with tax credits every day.

We are the only firm that utilizes an IRS defense audit to review our studies before they are completed. This and other best practices are at the core of our audit success rate to date. We help CPA firms and businesses from all service and industry sectors better document their processes so that fear of an audit will not stand in the way of significant tax savings.

We will respond to any Information Document Request (IDR) that is presented by any federal or state agency and provide full audit representation to our clients for no additional cost.

Request a free assessment to determine qualifying R&D tax credit eligibility

To learn more about Tax Point Advisors’ R&D audit representation services, simply fill out the form on this page and a member of our team will be in touch with you. Or, you may call us at 800.260.4138 nationwide.


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