Strategic Incentive Solutions
·
Short answer
The IRS opens an examination with written requests for information about your projects, people, records and costs. Businesses with project-level documentation kept at the time of the work usually find the process routine.
A claim for the R&D credit can be examined like any other item on a return. An examination is not a sign that something is wrong. It is a request to see the support. Businesses that kept good records usually find the process routine.
How an examination typically starts
The IRS contacts the taxpayer or the representative, usually in writing, and opens the examination. It then sends requests for information, often called information document requests. Responses are expected within a set time, and extensions are common when the request is broad. The IRS also publishes an audit techniques guide for the research credit that shows how its examiners are trained to look at a claim.
What examiners usually ask for
A list of the projects or business components claimed
Technical descriptions of the work and the uncertainty it addressed
The people who worked on each project and what they did
Records that show the work happened, such as designs, test results, tickets and notes
How wages and time were allocated to each project
Support for supplies and contractor costs
Interviews and site visits
Examiners may want to speak with the people who did the work, and sometimes to see the process or product in person. The best preparation is for the team to be able to explain, in plain terms, what they were trying to achieve, why it was uncertain and what they tried. A study that includes interview notes makes that conversation easier.
Where claims run into trouble
Work that was routine rather than experimental
Time allocated to projects without a record that supports it
Contractor costs where the business did not carry the risk or keep the rights
Claims written in general terms with no project-level detail
Records created long after the work, with nothing from the time it happened
Why project-level documentation matters
A study that lays out each project, the people on it, the testing performed and the costs behind it answers most of those questions in advance. Our studies are built that way because the same detail is what an examiner asks for. Your CPA gets the calculation and the supporting records together.
If a claim is selected
We help gather and organize the records, review the examiner's requests with your CPA and prepare the technical explanations. The exact scope of support depends on the engagement, so ask about it before you start.
What you can do now
Keep project records at the time the work is done, not years later
Track who worked on what, even roughly
Save test results, drawings and notes, including from tests that failed
Ask your CPA how long to retain the records
If the claim covers prior years, the IRS can still ask for the details it waived at filing time, so keep the underlying records. You can read more in our guide to amended returns. Good habits make any examination easier. To see where your work stands, start with a free 5 to 10 minute screening.
Sources
Official sources used for this guide:
Common questions
Find out what your work has earned
Free 5 to 10 minute screening. See which of your projects can earn a credit.
Keep reading
More R&D credit guides
Guides
R&D tax credit amended returns: what the IRS now expects
Missed the credit in past years? You may be able to claim it by amended return, but the IRS expects specific detail with the claim.
Guides
The R&D payroll tax offset for small businesses and startups
A small or new company with little income tax can still use the R&D credit against payroll taxes. Here is who qualifies and how it works.
Florida Credit
Does Florida have an R&D tax credit? What businesses actually claim
Florida does have a state R&D credit, but it is narrow. Most Florida businesses claim the federal credit instead. Here is the difference.