Many businesses don’t realize that they qualify for the Research and Development (R&D) tax credit. There are several services that can help you prepare your tax credits and reduce the chance of getting audited. These companies can do so faster than many manual services which don’t use computer programs for this task.
Any tax credit will undergo scrutiny in an audit, as these credits can be the difference of lots of money that the government will want to inspect. Many services will help to identify when these can be legitimately claimed and will offer to verify these in the case of an audit.
What Is the R&D Tax Credit?
The R&D tax credit is a federal tax credit available to companies who make improvements to advancements in technology or science with existing material. This credit is also available on the state level in most US states, which undergoes assessment against tax records of the previous quarter for businesses.
While the credit can undoubtedly be a financial benefit to companies involved in that sort of operation, without any cap on the amount of potential credit, it will lead to more governmental scrutiny.
What Is an Audit?
No one wants to find out about being audited, but it doesn’t have to be the end of the world.
Whether for a company or a private individual, this just means that the Internal Revenue Service (IRS) will cross-reference all accounts and financial information against what has been reported for taxes.
This audit might be after suspicion of fraud. However, it could be a random check, all the more reason to get one’s proper documents in order before this might happen.
Who Does Audits?
In the United States, the IRS performs audits, and they will always give notice ahead of time that the audit will take place.
Further, the IRS will give an exact specification of what they want within their letter, which you can even complete via mailed response. Always send copies of the documents to the IRS, not originals.
What Do They Want?
It is recommendable to be as organized as possible in handing over records to help maximize speed and minimize the risk of potential error. You should do this in chronological order and with specifications on the exact details of where the money has gone or from where you’ve received it.
While the IRS will specify what they need on a case-by-case basis, they might request several standard documents and proof. These include:
- Bills
- Receipts of purchase
- Canceled cheques
- Deeds of leases and mortgage
- Appraisals of property
- Legal records of theft
- Records of legal agreements and bankruptcy
- Debts
- Tax credits
R&D payroll tax credit requires an assessment against proof of development, such as lab notes and project lists.
It will be necessary to give evidence of how the company typically performs with previous quarterly filings, testimony from employees, and records of related expenses and payroll.
For Individuals
If there is reason to believe that a person is misusing company resources, this can be up for investigation.
For personal cases, they may also look into things like medical and dental records, travel logs, criminal records, and personal information like marriage records.
The above is not a comprehensive list, but anything that might affect one’s legal status or who has a record of income or expenses would likely come up in an audit.
For Companies
For auditing an organization, the following will be subject to a request for inspection:
- Quarterly filing
- Records of sales
- Acquisitions
- Mergers
- Information relating to shareholders
- Other statistics on employment
These should be mailed back with as much detail as possible, such as the exact quarterly filing dates.
R&D in Audits
It is vital to maintain records of research, lab results, computer software improvements, or records of whatever else might be involved in this research and development in the case of a potential investigation.
Since the R&D tax credits are dependent upon such product improvements etc., this can lead to legal problems without accurate records.
Many companies do not even realize that they are eligible for R&D credits, but it can result in huge savings potential.
Conclusion
Ultimately, if an audit occurs, all the necessary records will be specified by the IRS, but it is preferable that you are as prepared as you can be so that you do not get caught off-guard.
Although it might appear laborious to prepare and organize all these records since they will contain a large volume of documents of a legal or financial nature, you’ll spare yourself time and stress in the long run.
