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It is not uncommon for clients to ask the big questions:
What are the odds of an audit in the R&D tax credit application?
How can audit risk be reduced?
Does an amended return increase audit risk?
Will the IRS look a little harder this year?
It is true that claiming the R&D Tax Credit may increase the risk of an audit, and amending prior returns could bump that a bit more.
What does that mean as far as risk? Specialized firms regularly expect percentages of between 1% and 2%. Even if you’re one of the unlucky few, there’s little to fear as long as the R&D firm you have partnered with is properly prepared.
When applying for an R&D tax credit, you want to be sure you're doing everything properly to avoid unnecessary risk. One way to do that is to make sure you have all the documentation you need, follow a formal documentation process, and ask questions of your tax professional to ensure clarity.
Make Sure You're Writing Clear and Relevant Reports
In the event of an audit, if the IRS isn't able to understand your reports, you're not likely to receive the R&D tax credit you're looking for. Making sure the documents you submit are clear and accurate is crucial for limiting risk and securing those valuable credits.
Keep in mind that because your process is unique, the IRS will also need some help understanding exactly how each activity fits into the greater R&D process. While you don't want to make an IRS agent wade through scores of documents that don't relate to the R&D tax credit requirements, you do want to provide sufficient technical information to establish your qualifying status. A specialized R&D firm will wade through your documents and help you create a report that provides some clarity to the process.
Every tax return filed carries with it the risk of an audit. By working with a specialized R&D firm, clients can get about running their daily business and, in the event of an audit, leave the process of defending the credits to the professionals.