Grappling with the Most Difficult Research and Development Tax Credit Issues (Part 2)
In our last post, we discussed some of the issues regarding the Research and Development Tax Credit that Indago became aware of while at the 2017 Tax Credit Symposium. Some other research credit issues that were discussed during the symposium were Proper Estimating Techniques and Acknowledgement of the Facts in IRS Audits. Indago is here to help your company with these challenging issues regarding the Research and Development Tax Credit.
Proper Estimating Techniques: In a recent IRS Memo, the Service clarified an estimating issue for a certain taxpayer. While IRS memorandums are not controlling authority, the memos can provide guidance as to how the IRS would view a tax position. This particular claim focused on wages and the proper method to estimate wages. Numerous decisions have held that companies do not need to use detailed time tracking in order to claim the research credit. In this situation, the company used a two-step process to estimate the company’s wage expense for purposes of the research credit. First, the company estimated a percentage of projects that involved employees who conducted qualified research during some part of the project. The percentage did not provide an accurate analysis estimation of the time spent engaged in qualified activities. The estimating process was determined to be in violation of the regulations supporting the research credit. From the IRS perspective, the entire estimation must be defensible when establishing wage expenses. Indago can help you navigate these challenges based on the documentation your business maintains to capture expenses allowed by law.
Acknowledgement of Facts in IRS Audits: The IRS recently issued internal guidance regarding audit policies surrounding the research credit. In particular, the audit process is intended to be open and collaborative and encourages agents to collaborate with issue teams. Generally, these developments are encouraging for companies as it is in your best interest to have experts reviewing your claim. However, the audit process now includes a new document called an “Acknowledgement of Facts.” The IRS issues the Acknowledgement of Facts after collecting data and facts surrounding the claim. The document may contain partial or incomplete information and be slanted towards the IRS’s positions. If issued one of these documents, contact Indago to help you assist in reviewing and responding to the claim.