IRS Campaign Addresses Research Credit and Expenditure Incentive Compliance

On February 27, 2020, the IRS posted a new Large Business and International (LB&I) active compliance campaign, Research Issues, for Internal Revenue Code (IRC) Sections 41 and 174. The campaign is intended to increase voluntary compliance, focus resources on the highest-risk research issues, and make IRS examinations for R&D credits and expenditures more consistent.

Following is an overview of key changes introduced by the campaign and steps your business can take to stay compliant.  

Background

The IRS launched LB&I campaigns in January 2017 to help redefine compliance work and build a supportive infrastructure. The program allows LB&I to address significant compliance and resource challenges. However, campaign development requires extensive resources, including planning, training, tools, metrics, and feedback.

Key Changes

The LB&I Active Campaigns website provides insight into the purpose of the Research Issues campaign, stating:

The Research Issues Campaign will address research credit and research and experimental expenditures issues. Issues involving the research credit and research and experimental expenditures under IRC Sections 41 and 174 are some of the most prevalent tax issues within LB&I, utilizing significant examination and taxpayer resources.

The campaign will employ various treatment streams including issue-based examinations, form updates, and requests for guidance. Other treatment streams will be considered as the campaign progresses. The campaign objective is to promote voluntary compliance, focus resources on the highest risk research issues, and increase consistency of examinations.

In other words, the campaign is intended to heighten research credit and expenditure incentive compliance through more-focused examinations and documentation review. This means businesses will need to be prepared for a rigorous review and be able to present detailed records upon IRS inquiry.

Steps to Prepare

Research incentives provide taxpayers with a valuable opportunity to increase cash flow.  However, leveraging these incentives requires an understanding of:

  • Rules and regulations governing the incentives
  • IRS documentation standards
  • The research conducted by the taxpayer

With heightened focus on the research credit and expenditures under IRC Sections 41 and 174, it’s critical taxpayers retain documentation that:

  • Substantiates amounts. Including financial, tax, and payroll records.
  • Provides nexus. Demonstrates nexus between the amount and the activities performed, such as project accounting or time-tracking records.
  • Identifies and demonstrates qualified nature of activities. Such as development reports, patents, and testing documentation.

We're Here to Help

To learn more about research credit and expenditure incentives contact your Moss Adams professional.