You may be thinking that this is not much of a tip, that reading the full document goes without saying, sadly, many have learned a hard lesson when they skim rather than read.
To illustrate how often people fail to read legally significant documents, ProPrivacy.com ran a test and found that 99% of survey respondents agreed to surrender ridiculous things buried in terms and conditions contracts. They agreed to terms such as the naming rights of their firstborn child, permission to give their mom full access to their browsing history, and the ability to “invite” a personal FBI agent to Christmas dinner for the next 10 years.
Although the ProPrivacy.com test was a fun social experiment, the failure to read the full document has had significant negative results for taxpayers when the IRS conducted an R&D credit examination.
SPRX R&D Credit Tip – read the full document before you either discard it as not useful or include it in an R&D credit report as useful.
Including the Bad Stuff
Here is just one of many available stories of R&D credit professionals providing bad documentation to the IRS because they failed to read.
A taxpayer performed research related to the develop of industrial machinery. During an interview with the project leader (we’ll call him “SME”), the R&D credit professional (we’ll call him “Dan”) asked if SME had any documents related to the research. SME found a report and forwarded it to Dan.
Dan noticed that the full report was over 200 pages. Dan skimmed through the first few pages and saw that the report did indeed address the development of a new innovative piece of machinery. Dan thumbed through the rest of the report and saw that there were a lot of data charts, diagrams, and even some photos of the testing. With little additional thought, Dan included the report in the R&D credit study.
A few years later, the R&D credit was being examined by the IRS. As part of the exam process, Dan provided the 200-page report to the IRS agent (among other documents). The agent read every page of the report. The agent confirmed that the report addressed research, however, the report confirmed that the research was conducted in a foreign country.
Dan’s sloppy document review resulted in a disallowance for the taxpayer.
Excluding the Good Stuff
Excluding good documents can be as damaging as including the bad documents.
Skimming documents can lead to excluding useful documents. This was demonstrated by a side-by-side document analysis comparison run by a CPA firm.
The firm selected 15 large research documents that contained a combined 432 pages. The firm asked its top R&D credit manager, its R&D credit partner, and SPRX tools to review the documents and identify the useful R&D credit documents. The manager found 3 useful documents, the partner found 5 useful documents, and SPRX found 8 useful documents.
After the test the manager and the partner reviewed the 8 documents and agreed that all 8 documents were useful. Both the manager and the partner admitted that they did not read every page of the documents. Their argument was that they had seen so many documents that they could quickly identify what is useful and didn’t need to read every page. Clearly, these assumptions are incorrect.
One of the useful documents that both the manager and partner excluded had over 100 pages. The useful information was found on pages 87 to 92. Both the manager and partner stated they didn’t see that language because they stopped reading before reaching those pages.
This test highlights a significant problem for taxpayers. The manager concluded that 20% of the documents provided by the taxpayer were useful when 53% were useful. The manager missed 63% of the useful documents. This means the taxpayer would spend more time trying to find useful documents and while spending that extra time, taxpayer would be excluding 63% of the available useful evidence.
A.I. technology reads every word on every page in seconds. This is reason enough to embrace A.I. technology.
The SPRX tools have been trained to read, comprehend, and score research documents. The tool scores documents based on how persuasive the documents might be in proving one or more of the R&D credit qualification tests have been met.
The biggest challenge in R&D credit document review is boredom. Reading hundreds of pages of technical information is boring. A.I. tools are a perfect remedy. Not only do these tools read every word on every page they are constantly learning and improving.
At SPRX.tax we build the tools that save you time…and money