Technical topics regarding tax preparation.
Thoughts on R&D case
Pros, I received this from checkpoint about a company which was denied R&D credits for which seemed to be valid expenses. Here is the case: https://www.ustaxcourt.gov/UstcInOp/Opi ... x?ID=11930
. It seems to me the service was looking for a victim here to not give credit to. Just an unlucky company.
What are your thoughts? Thank you.
It is not surprising. The Service has stepped up their examinations in this area in recent years. Every research credit study needs to identify, the uncertainty or uncertainties for each business component and the steps taken to resolve those uncertainties. The Service does not accept mere handwaving and it is best to use original source documentation or a transcript of an interview to document this information. (Interview transcripts may be hearsay, but they allow witnesses to refresh their memories years later.) If the original study does not do so, the taxpayer has a very deep hole from which to escape. It sounds like this study was deficient in this respect.
The rules require a scientific/methodical process of experimentation. There was no evidence of that anywhere. That’s what did the taxpayer in. I think all the other requirements were met, including the determination of uncertainty.
The stuff this company did was pretty scientific. And it all (or most of it) may have qualified for the credit, assuming there was a process of experimentation. But with no evidence of that, the judge’s hands were tied.
The IRS loves these cases. They’re real easy to win for the IRS. If the Regs say you need a documented process of experimentation, and there wasn’t one, it’s a slam dunk for the IRS
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