Why research & development tax credits face tougher IRS examination
In 2015, the Research and Development (R&D) tax credit was made permanent following its initial introduction in 1981. Congress enacted the research credit to provide an incentive for American industry to invest in research and experimentation. Since its enactment, the research credit has been extended 16 times, until it became permanent in December 2015.
With more than $5 billion in federal R&D credits granted each year, it’s not surprising this money is closely monitored. With billions of dollars at stake, it’s crucial to ensure proper allocation.
Claims for R&D tax credits are regarded by the Internal Revenue Service (IRS) as a “Tier One” priority under its new Strategic Plan. This plan, as stated by the IRS, “serves as a roadmap to guide their operations and to meet the changing needs “How COVID-19 Could Impact Your R&D Tax Credit” and expectations of our nation’s taxpayers and tax professionals who serve them.” This means R&D claims are closely examined to determine their legitimacy.
The R&D credit is an area of tax law that’s seen many changes in the last decade, including what qualifies as “research and development.” In 2019, the IRS provided its annual list of the “Dirty Dozen” tax scams. The list included “Excessive Claims for Business Credits,” particularly stating the Research and Development (R&D) credit.
The IRS often sees expenses from non-qualified activities included in claims for the research credit. Qualified research expenses (QREs) include only in-house research expenses and contract research. Qualified research expenses do not include expenses without a proven nexus between the claimed expenses and the qualified research activity.
With more than an estimated $18 billion in R&D credits reported by businesses in nearly every industry in 2019, the IRS has its work cut out when granting these tax credits.
According to the IRS, improper R&D claims involved failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses. If you’re unsure whether or not you should apply for the R&D tax credit, click here to find out if your business qualifies [Get Free Assessment].
