Are hidden costs destroying your R&D Credit?
Hidden costs are costs we are not aware of that can erase the benefit we desire.
Hidden costs are prevalent in all processes and may take the form of unnecessary meetings, inefficient processes, repeated tasks, or interruptions.
Be it intentional or not, R&D credit providers have a bad habit of obscuring the full cost of an R&D credit study. They know that if they can get their client to invest significant time and effort, they will continue with the process despite these hidden costs.
These hidden costs are often substantial. A 2021 survey of over 600 participants confirms that R&D credit hidden costs are often more than 200% the CPA’s fee. And the worst part is that reducing CPA fees only increases hidden costs.
Since every CPA follows the same basic R&D credit analysis process, they all pass along similar hidden fees.
Hidden Costs in Your R&D Credit Study
A recent 2021 survey revealed the following 6 hidden costs buried in your R&D credit study:
- Cost of Interviews
- Cost of IRS exam
- Cost of Gathering Data
- Cost of Delayed Reports
- Cost of Missed QREs
- Cost of Unskilled CPAs
Cost of R&D Credit Interviews
Back in the 1990s when people started computing R&D credits most documents were hard copy paper documents stored in bankers boxes around the country. Rather than search for, sort through, and read all these documents, accountants decided to interview the people who participated in the research projects. During a 60 to 90 minute meeting they would ask questions about a person's job description, time reporting, and project activities.
This R&D credit interview quickly became the standard.
Over the past 30+ years, R&D credit interviews have remained unchanged. Even with a wealth of documented evidence at their fingertips, accounts continue to interview employees for 60 to 90 minutes.
The cost of an interview is much more than 60 to 90 minutes of a person’s time. When you consider that a person will prepare for an interview and have additional tasks stemming from the interview, the average cost of an interview is actually 3X the labor rate of the person being interviewed.
Cost of the IRS Exam
The IRS has always been suspicious of R&D credits. The IRS knows that accountants interview people to gather information. The IRS expects (and they are not wrong) that the accountants are just making up the numbers during the interviews.
In September 2021 the IRS released a new policy. It specified what information the IRS agents would expect to have if you were to file a credit. You need to have a list of every project, an explanation of what each employee did on every project and what information each employee was trying to discover on the project.
Most accounting firms do not want to take the time to provide all of the R&D documentation to the IRS. Instead, they only do the bare minimum and hope that the IRS does not audit their clients. Unfortunately, it is all too common for the IRS to catch firms unprepared and give them a larger adjustment than normal.
Lack of adequate preparation increases the cost of an IRS exam.
Cost of Gathering Data
Back before accounting systems were fully integrated, a lot of the information the accountants needed was in hardcopy and stored in boxes. The only option was to ask the taxpayer to sort through the boxes and get the information.
Often the information was in source documents and not summarized in spreadsheets. For example, the wages would be on W-2s. Someone would have to type the W-2 data into a spreadsheet. Since the accountants charged so much per hour…the taxpayer would do the work.
Accountants got into the habit of asking the taxpayers to provide information in a particular format. So today, taxpayers still spend a lot of time cutting and pasting data, or running custom reports for the R&D credit accountants. This unnecessary labor is a hidden cost.
Cost of Delayed Reports
Twenty years ago, in the age of paper, and R&D credit report would fill several large 3 ring binders. Assembling such a report was very time consuming and expensive.
Taxpayers often needed the credit number for their tax return or for their financial statements before the report was completed. This started the industry practice of delivering the number and then delivering the report several months (or years) later.
Accountants like doing this because they can spread out their workload across the year. Unfortunately, delivering a number without the report negatively affects the taxpayer. Causing taxpayers to take the fall when the IRS comes to audit.
Cost of Missed QREs
Since the R&D credit rules are subjective…they are wide open for abusive interpretation.
Additionally, the definitions of qualified costs have changed over the years. This means, it takes a level of expertise to know all the rules of R&D credits and be able to identify all the qualified costs.
Tax Court judge, Judge Vasquez, stated in a case opinion during the Suder v Commissioner (2014) case that the R&D credit rules were the most complex and difficult to apply in all the tax code.
There are many young professionals engaged in performing R&D credit projects. They get so busy doing the work that they don’t take the time to read and study and become truly proficient.
When you combine the complexity of the credit rules with the lack of proficiency by the R&D credit professionals…you get missed qualified research costs. R&D credit professionals notoriously miss qualified costs.
Cost of Unskilled CPAs
R&D credit consulting is not a traditional tax consulting career path.
Traditionally, a tax professional begins consulting after many years of experience, study, and proficiency. They approach tax problems with a broad perspective which helps them identify potential traps and errors.
R&D credit consultants often jump right into consulting before they have the chance to gain experience. They are not prepared to identify problems or respond to questions in the field. They miss key issues because they lack practical experience.
Such unskilled employees cause taxpayers the hidden costs of missed QREs, time, and retraining employees after the damage is done.
Eliminate Hidden Costs
Taxpayers are eliminating hidden costs with artificial intelligence tools.
AI tools can analyze all available data and predict results based on that data. Subject matter experts then validate and edit the predictions.
This process eliminates over 80% of the unnecessary busy work that drives hidden costs.
