How to be Prepared if Your Clients Research and Development Credit is Audited

 

The Research and Development Credit is a nice benefit for taxpayers performing eligible activities. If the taxpayer gets selected for a Federal Tax Audit, this credit has a high probability of being examined. The credit gets audited for a myriad of reasons but based on my experience, two reasons stand out.  Since the credit is a dollar for dollar reduction of the taxpayer’s tax liability, if the auditor can limit or eliminate the credit, it has the potential to be a nice sized assessment. Second, the actual calculation of the credit relies upon assumptions/estimates on the taxpayers part and auditors love gray areas.
In a recent audit that one of my clients underwent, a Research and Development Credit specialist was brought in. The agent only audited this area and brought an extensive level of knowledge to the table. The documentation that was requested and necessary to support the credit is listed below –
1.       W-2’s of the Employees Used in the Credit Calculation
2.       Percentages of the Wages allocated to Research and Development
3.       Methodology used to Determine Percentages Used in Allocation
4.       Job Descriptions of these Individuals
5.       Job Titles
6.       Project Descriptions
7.       List of Supplies Claimed
8.       Contracts and Invoices  for Subcontractors
The agent will then analyze these documents, scrutinizing the activities of the employees and the percentage allocated to R&D activities. Only activities that are directly involved in R&D are eligible. For example, the time of the R&D Department Manager will be reviewed to make sure that activities involving the management of the department are not allocated to the calculation. Only the manager’s activities that are directly related to research and development in the laboratory sense are eligible. 
Another component of the calculation is the amounts paid to subcontractors to do R&D on behalf of the taxpayer. Make sure to have contracts and invoices available.  Lastly, make sure to analyze the supplies listing. Only supplies used directly in the R&D activity are eligible. 
In a perfect world, all of these documents and analyses would be done prior to claiming the credit on the tax return. Unfortunately, due to time constraints and fee sensitivity, the drilling down to source documents is usually not done prior to filing the return. If your client is chosen for audit and the credit was claimed, start gathering the information as soon as possible because auditors love to examine this calculation. 

This blog

Ann Callari, CPA, MST is a Senior Tax Manager at the NJ Regional Firm, Rotenberg Meril Solomon et al in Saddle Brook, NJ. Ann founded and heads the firm’s tax department. She specializes in corporate and partnership taxationas well as multi-state compliance issues. Ann has always worked in public accounting and enjoys the tremendous challenge of staying abreast of the ever-changing tax laws. She feels public accounting keeps you sharp and on your toes. Ann is a working mother who continually juggles the demands of the children she adores and the career that she is passionate about. She looks forward to sharing her tax knowledge and professional experiences with her fellow bean counters and encourages a healthy exchange of ideas and commentary.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

39158

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

70366

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

43962

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

81095
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
17745

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

50973

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

74898

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

22656

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

59010

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

31782
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
95431
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
22718

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

47659
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
24580
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
28576

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

91705

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

29996

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

102502

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

55100

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

36294
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
62230

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

87594

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

48696