Tip #18 – Try Cooperation

Try cooperating with the IRS from a position of strength.

Cooperation is not only a great life hack it’s an R&D credit strategy as well.

Dwight D Eisenhower nailed it when he said, “Only strength can cooperate. Weakness can only beg”.

What will your strategy be when the IRS comes to examine your R&D credit? Will you cooperate from a position of strength or beg from a position of weakness?

SPRX.tax R&D credit tip – Try cooperating with the IRS from a position of strength.

2010 working group

In 2010, IRS Large Business and International (“LB&I”) leadership recognized that the average R&D credit exam took 24 months, resulted in a 100% disallowance, and required a 24-to-36-month appeal to reach a final resolution. This was not working for anyone.

LB&I leaders organized a meeting selected R&D Credit CPAs and IRS specialists to discuss the R&D credit exam problems. LB&I leaders opened the meeting by asking a question, “why can’t taxpayers provide the documents the IRS examiners request”?

The answer is not simple. On one hand there is regulatory and judicial language that says taxpayers are not required to maintain specific documents in specific formats. On the other hand, there is legal and judicial language that says taxpayers are required to provide some documentation.  

The working group clearly defined the document request battle lines. IRS leadership made it clear that they expected taxpayers to provide documents that proved each qualification test was met for each project. CPAs made it clear that such a request was too expensive, and the cost of complying could easily be greater than the credit itself.

Responding to document requests

Document requests continue to be a source of contention. The way you respond sets the tone for the entire IRS exam process. Try cooperation rather than contention.

IRS agents are required to gather research documentation. It is certainly reasonable to expect that your research activities generate some documentation. While you are not required to keep research documentation in a particular format, you do have the burden of proving that research activities have occurred.

It’s expensive for CPAs to manually review documents. Accordingly, most CPAs will advise you to wait for the document request before beginning a review.  This “audit lottery” strategy puts you in a position of weakness.

The IRS expects you to have performed a complete analysis of research activities and costs before you file a credit. They become suspicious when you are not able to respond to simple document requests. Once they are suspicious, they ask more questions, request more documents, and disallow more credit.

Performing a complete document review before the IRS exam ever begins puts you in a position to cooperate. When you are prepared to respond quickly, you can eliminate suspicion, shorten the exam, and sustain more credit.

Technology makes it possible

Manually gathering and reviewing thousands of pages of research documents is time consuming and expensive. It’s a difficult task most people try to avoid.

Artificial intelligence (“A.I.”) tools were made to review documents. The SPRX.tax research document review tool has been trained to read, comprehend, and score documents. The model scores each document based on how persuasive the document may be during an IRS exam.

A.I. technology strengthens your position so that you can cooperate from a position of strength rather than beg from a position of weakness.

At SPRX.tax we build the tools that save you time…and money