The Research Claims Audit Techniques Guide: Credit for Increasing Research Activities Section 41 just released by the IRS is a great roadmap for practitioners of what to expect on an audit. Although the research credit has not been extended, it is expected to be. This guide issued by the Large and Mid Size Business Division (LMSB-04-0508-030) really shows how IRS will scrutinize research credit refund claims (RC claims), which have been designated a Tier I Issue, which in turn means they are of high strategic importance to LMSB and have significant impact on one or more industries. The guide is particularly geared toward those prepared under the most common approach being used, prepackaged RC claim studies. How those studies are typically done is explained in detail, as well as the potential problems that IRS sees with them. Eustace, T.C. Memo 2001-66, aff’d 312 F.3d 1254 (7th Cir. 2002) is cited as presenting a typical research credit claim involving an accounting firm study and a prepackaged submission. This is an extensive section in the guide on how an auditor should go about evaluating RC study-based claims and specific advice that an information document request (IDR) should be made for the engagement letter from the outside consultant conducting the study. Even the accompanying exhibits have great information, such as a 19-step checklist that the auditor should follow when reviewing the claim, a comprehensive mandatory research credit claims IDR, and even a check sheet to help deal with computational issues. I don’t get excited by every audit technique issued, but this captured my interest because it reminded me of a guide IRS put out a number of years ago on cost segregation. That guide was used by some practitioners as a blueprint on how to successfully conduct a cost segregation study that would withstand IRS review. Both that and the latest guide illustrate that as more professionals utilize studies as significant revenue generators by justifying the fees charged as a small percentage of the tax benefits obtained, IRS will adopt a uniform policy with regard to them. There is a great benefit to this as the audit technique guide is very informative and explains exactly what won’t and will pass IRS muster.
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