What to Know About the Research & Development (R&D) Tax Credit and the IRS’ New Compliance Campaign

The R&D tax credit can be a powerful incentive, often providing a hidden source of cash from prior years’ expenses while also serving to significantly reduce current and future years’ federal and state tax liabilities. The R&D tax credit is also a tool for refueling a company’s R&D efforts. Planning ahead by creating an infrastructure that identifies qualifying research activities and collects contemporaneous documentation is essential to reducing future tax liabilities and synthesizing an R&D tax credit that will be sustainable on audit examination.

There has been a new development related to this credit. On February 27, 2020, the IRS issued a new compliance campaign focusing on the R&D tax credit. This campaign was identified through the Large Business & International (LB&I) Division data analysis and suggestions from IRS employees. LB&I’s goal is to improve tax return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited IRS resources.

The IRS campaign will employ various treatment streams including issue-based examinations, form updates, and requests for guidance. Other treatment streams will be considered as the campaign progresses. The campaign objective is to improve voluntary compliance, focus resources on the highest risk research issues and increase the consistency of examinations.

As the LB&I division begins its refocus on R&D tax credit claims, it is important for taxpayers who have claimed or will claim the R&D tax credit to proactively prepare and sufficiently document their findings. The burden of proof regarding expenses remains on the company, which must therefore maintain documentation to illustrate the nexus between the expenses and qualifying research activities. Now is the time to be sure your documentation is sufficient to support your R&D tax credit claims and make sure you have the processes in place to best capture all eligible expenses and activities.

Anchin’s R&D tax credit practice is particularly skilled and experienced at identifying qualifying projects and initiatives in each area of your business, and we are experts at examining, quantifying, and documenting all allowable expenses towards each company’s research credit.

To discuss these and other matters of importance related to the R&D tax credit, contact Yair Holtzman, Leader of Anchin’s R&D Tax Credit Group at 212.536.6933 or [email protected].