Source: https://www.rdtaxsavers.com/AuditDefense
Timestamp: 2019-05-25 02:26:49
Document Index: 677446123

Matched Legal Cases: ['§ 41', '§280', '§41', '§41', '§41', '§41', '§174', '§41', '§41', '§41']

Research & Development Tax Credit Audit Defense - R&D Tax Savers
Our comprehensive studies thoroughly explore your companies' fundamental qualifying research activities resulting in more complete and detailed documentation in order to provide sufficient substantiation to prevent IRS challenges. In the case of an IRS audit, our IRS enrolled agents, lawyers, and engineers, make sure you are fully prepared and in the best position to defend your claim. Our previous audit experience, as well as, our unparalleled knowledge of the R&D credit legislation, regulations, and case law allow us to recommend strategic practices to combat every auditor denial position. Of course this is support is completely complimentary as we want to ensure your company can take full advantage of the credit.
Other Directives / Guidlines
These Audit Techniques Guides (ATGs) help IRS examiners during audits by providing insight into issues and accounting methods unique to specific industries. While ATGs are designed to provide guidance for IRS employees, they're also useful to small business owners and tax professionals who prepare returns. ATGs explain industry-specific examination techniques and include common, as well as, unique industry issues, business practices and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence.
Source: Research Credit - Internal Revenue Service (IRS)
Original Returns ATG - June 2005
Chapter 2 - Determining the Scope
Chapter 3 - Research Credit Computation
The Alternative Incremental Research Credit (AIRC)
Aggregation Rules of Section 41(f)
Chapter 4 - Qualified Research Expenses (QREs)
Chapter 5 - Qualifies Research Activities
Chapter 6 - The Consistency Requirement
Chapter 7 - Substantiation and Recordkeeping
Chapter 8 - Sampling Methodologies
Chapter 10 - Research Credit Issues
Chapter 11 - Contact Information
Amended Returns ATG - May 2008
Chapter 1 - Research Credit Claims
Chapter 2 - Audit Techniques for Examining RC Claims
Chapter 3 - Administrative Considerations (Published 5/2008)
Exhibit A - Research Credit Claim Checklist - May 2008 (IRS / PDF)
Exhibit B - Limitation Periods for filing Research Credit Refund Claims - May 2008 (IRS / PDF)
Exhibit C - Mandatory Research Credit Claims IDR - February 2009 (IRS / PDF)
Exhibit D - Computation Check Sheet - May 2008 (IRS / PDF)
Software ATG - March 2010
1. Process of Experimentation
2. Selected Exclusions from Qualified Research
I. Exclusion for Research after Commercial Production
II. Exclusion for Adaptation
III. Exclusion for Duplication
IV. Exclusion for Surveys, Studies, Research Relating to Management Functions
V. Exclusion for Research in the Social Sciences, etc.
Software Development - Common Activities
High Risk Categories of Software Development
Moderate Risk Categories of Software
Low Risk Categories of Software
Aerospace ATG - January 2005
D. IRC § 41(d) - Qualified Research
Contract Services - Independent Contractors
Pharmaceutical ATG - April 2004
a. Stage One - Preclinical/Discovery Research
b. Stage Two - Clinical Development
c. Stage Three - Regulatory Review
i. Department - Regulatory Affairs
d. Stage Four - Post-Marketing
Exhibit A - Documentation Guidelines
Exhibit B - Hypothetical Organizational Chart
Exhibit C - Departmental Reporting Structure
Exhibit D - Research Credit Wage Issue Chart (See "Using Exhibit D")
IRS Tier 1 Issues
As of August 17, 2012, the Issue Tiering Process is no longer in effect, per directive from LB&I Commissioner Heather C. Maloy. Tiered Issue pages and resources will remain on the IRS.GOV website temporarily for historical / reference purposes only.
IRS Tier 1 Isuues
As of August 2012, the Large Business and International division (LB&I, formerly the Large and Mid-Size Business LMSB) ended the Issue Tiering Process, per directive from Commissioner Heather C. Maloy. Previously, the R&D tax credit was classified as an IRS Tier I issue. These high risk transactions pose the highest compliance risk across multiple LB&I industries and generally include large numbers of taxpayers, significant dollar risk, substantial compliance risk, or are high visibility.
Tiered Issue pages and resources will remain here and on the irs.gov website temporarily for historical / reference purposes only.
Source: Research Credit Tier 1 - Internal Revenue Service (IRS)
IRS Tier System Discontinued - August 2012
FOR:	All LB&I Employees
FROM:	Heather C. Maloy
SUBJECT:	Tiered Issues
As part of LB&I's efforts to continually improve, we undertook a review of LB&I's Tiered Issue Process. Our review determined that, while the Tiered Issue Process may have been well suited for the audit of tax shelter type issues, going forward LB&I needs a different approach to manage compliance priorities and provide guidance to examiners. This new approach should:
Tier 1 Quick Reference Guide - October 2010
IRS Directive #2 - January 2009
Internal Revenue Bulletin 2008-13: Notice 2008-39 - March 2008
Part III- Administrative, Procedural, and Miscellaneous
An overpayment of tax for a taxable year generated, in whole or in part, by the research credit and not taken into account on a taxpayer's original return may be taken into account by the timely filing of a claim for credit or refund.
The claim for credit or refund shall indicate at the top "Refund-Research Credit" and include a copy of the Form 6765, Credit for Increasing Research Activities (if any) filed with the original return and an amended Form 6765.
Notice 2002-44, 2002-2 C.B. 39 is superseded.
For questions regarding this notice, contact Paul V. Colleran of the Office of Division Counsel (Large and Mid-Size Business) at (617) 565-7838 (not a tollfree call).
IRS Directive #1 - April 2007
1. high-level estimates,
2. biased judgment samples,
3. lack of nexus between the business component and qualified research expenses (QREs), and
4. inadequate contemporaneous documentation.
Mandatory Information Document Request (IDR)
Please answer the following questions. All answers should be complete and specific to the question. Any reference to other documentation without a complete answer to the question will be considered an unsatisfactory response. All answers should refer to the taxable period ending * * * * * * (insert no more than one tax year per IDR).
1. Have you retained a third party to assist you in preparing this claim? If the answer is yes, identify the third party and specify whether the fee to be paid by you to the third party is contingent upon the amount of the research credit ultimately allowed under the claim.
2. Did you make an I.R.C. §280C(c)(3) election on your original tax return? If yes, what was the amount of the research credit claimed?
3. Are you required by I.R.C. §41(f)(1) to aggregate your research expenditures with other members of the same controlled group or other trades or businesses which are under common control? If yes, identify the controlled group members and other trades or businesses which are under common control, and answer the following questions:
a. Have the other members or trades or businesses been notified of your recomputation of the research credit and the effect that your credit allocation will have on their credit?
b. Have the other members or trades or businesses filed claims that affect your allocated portion of the group credit? If yes, explain the effect on your allocated portion of the credit.
c. Have the other members or trades or businesses had their research credits adjusted in any way by the IRS that affects your allocated portion of the group credit? If yes, explain the effect of the adjustment on your allocated portion of the credit.
4. In computing the group credit for the credit year, which includes computation of the base amount, have you accounted for all acquisitions and dispositions of members of the controlled group, or trades or businesses which are under common control, in accordance with the aggregation rules of I.R.C. §41(f)(1)? If no, explain why you have not accounted for all acquisitions and dispositions.
5. In computing the credit for the credit year, which includes computation of the base amount, have you accounted for all acquisitions or dispositions of a major portion of a trade or business or major portion of a separate unit of a trade or business, as required by I.R.C. §41(f)(3)(A) or §41(f)(3)(B)? If no, explain why you have not accounted for all acquisitions and dispositions.
6. Did you use project accounting to capture costs in your financial books and records? If yes, did you use this project accounting to identify and capture the additional qualified research expenses ("QREs")? If no to either or both questions, describe the method used to identify and capture the additional QREs and describe how this alternative method connects QREs with the financial books and records.
7. Please identify by dollar amounts where these additional QREs were deducted on your original return, i.e., cost of goods sold, capitalized as part of plant or equipment, overhead accounts or claimed and deducted as research expenses. What was your adopted method of treatment for R&E expenditures under I.R.C. §174? Did you report the additional expenditures in compliance with your adopted method of treatment? If not, please explain?
8. Do you have contemporaneous documentation that:
a. Identifies each new or improved business component for which the additional QREs are being claimed? If no, how have you identified each new or improved business component as defined in I.R.C. §41(d)(2)(B)?
b. Identifies qualified research by each new or improved business component? If no:
1) How did you identify that qualified research relates to development of a new or improved business component?
2) How did you determine that you satisfied the 80% process of experimentation requirement of I.R.C. §41(d)(1)(C)?
c. Identifies, by each new or improved business component, each employee whose wages are being claimed as QREs? If no, how have you identified the employees that are being claimed as having performed qualified services by each new or improved business component?
d. Tracks, by each new or improved business component, the time spent by each employee performing qualified services? If no, how have you determined the amount of employee qualified services that should be allocated to new or improved business component(s)?
e. Identifies the general ledger accounts which were used to quantify the QRE supplies?
f. Identifies the amount of QRE supplies consumed in the conduct of qualified research for each new or improved business component? If no, explain how you determined the amount of QRE supplies used in the conduct of qualified research.
g. Identifies claimed contract research expenses by contractor, QRE amount and each new or improved business component?
1) Have you retained copies of all the contracts for which contract research expenses have been claimed?
2) Do the terms of each contract for which contract research expenses have been claimed provide
a) for the performance of qualified research;
b) that payment(s) to the contractor(s) were required to be made even if the research was not successful; and
c) that you would retain substantial rights to the results of the research?
9. For any research you performed for which you were a contractor, do you have contemporaneous documentation that identifies your claimed research expenses by contract, QRE amount and each new or improved business component?
1) for the performance of qualified research;
2) that payment(s) to you (the contractor) were contingent on success of the research; and
3) that you would retain substantial rights to the results of the research?
10. Does the amount of additional QREs include any expenditure for overhead expenses, general and administrative expenses, indirect research expenditures or depreciation allowances? If yes, provide the dollar amount(s) of additional QREs claimed for each type of expenditure.
11. Does the claim rely on any oral testimony or employee surveys to determine the additional QREs in the credit year? If yes,
b. Was the oral testimony or employee survey answers provided by individuals who directly conducted the claimed qualified research? If no, identify who provided the oral testimony or answered the survey;
c. Provide the total dollar amount of qualified services performed only by the employees who were interviewed or answered the survey; and
12. Does the claim rely on any oral testimony or employee surveys to determine QREs in the base years? If yes,
c. Provide the total dollar amount of the qualified services performed only by the employees who were interviewed or answered the survey; and
13. Does the claim rely on estimates or extrapolations to determine any portion of the QREs in the credit year? If yes, describe the estimates or extrapolations methodologies employed and provide the dollar amount of the QREs, which was determined based upon an estimation or extrapolation technique.
14. Does the claim rely on estimates or extrapolations to determine any portion of the QREs in the base years? If yes, describe the estimates or extrapolations methodologies employed and provide the dollar amount of the QREs, by year, which was determined based upon an estimation or extrapolation technique.
15. Does the claim rely on estimates or extrapolations to determine any portion of the gross receipts used to compute the base amount? If yes, describe the estimates or extrapolations methodologies employed and provide the dollar amount of the gross receipts, by year, which was determined based upon an estimation or extrapolation technique.
16. Was any form of sampling used to determine your QREs? If yes,
17. Have you complied with the consistency requirement of I.R.C. §41(c)(6), which requires that the QREs used in determining the fixed-base percentage be determined on a basis consistent with the determination of the QREs for the credit year? If yes, state how you complied with the consistency requirement in determining the fixed-base percentage that was reported on your original (if applicable) and amended Form 6765.
18. Provide the name(s) and phone number(s) of the person(s) who completed this questionnaire.
1. Reference, above, to "additional" QREs refers only to the QREs in the claim that were not reported as QREs on the originally-filed tax return.
2. Reference, above, to the term "base years" refers to the years used to compute the fixed-base percentage.
Coordinated Issues Papers
Source: Reseach Credit - Internal Revenue Service (IRS)
Source: Coordinated Issues Papers - LB&I
Extraordinary Expenditures for Utilities - May 2006
Qualified Research Expenses - June 2004
Biotech and Pharmaceutical Legally Mandated R&E Expense - June 2003
Internal Use Software - August 1999
Qualifying Wages - February 1999
Data Processing Technical Writers - February 1996
Membership Payments to Industry Research Organizations - July 1993
Here we have collected all miscellaneous documentation the IRS has published.
Schedule M-3 News - August 2011
FIX The IRS web version can be found here.
FIX You can download a PDF version here.
Amended Returns Refund Claims Containing Invalid IRC 280C - August 2005
Planning and Examination in Branded Pharmaceuticals - April 2004
Generic Drugs - January 2001
Field Directive on the Use of Estimates from Probability Samples - November 2009
Field Directive on Sampling Methodologies - March 2002
Statistical Sampling Methodology - May 2004
Current Audit Inventory Guidelines and Claim Processing - July 2002
Exhibit A - Research Credit Claim Check Sheet - May 2008
Exhibit B - Refund Claims Limitation Periods - May 2008
Exhibit C - Mandatory Information Document Request IDR - February 2009
Exhibit D - Computational Issues - May 2008
Generic Legal Advice Memorandum - February 2008
According to Internal Revenue Bulletin 2008-13: Notice 2008-39 (IRS / PDF) "Notice 2002-44, 2002-2 C.B. 39 is superseded"
For historical purposes we have included a PDF of Notice 2002-44 below.