By Phil Williams, JD, BSME

Key Takeaways

  • More companies than ever are taking advantage of engineering-based credits and incentives – just remember there’s no free lunch when it comes to your taxes.
  • Having a sound methodology and the right team in place will ideally position you to handle the audit process.
  • Auditors and appeals agents are human too. Keep the lines of communication open at all times.

The Research and Development Tax Credit is a government-sponsored tax incentive that rewards companies for keeping their R&D in the United States.

The credit was designed to incentivize innovation throughout the U.S. economy and to keep technical jobs here. Thanks to numerous modifications and expansions over the years, more companies than ever before can benefit from this valuable incentive.

Of course, when it comes to taxes, it’s natural to suspect there’s no free lunch. As we’ve seen time and time again in our practice, many companies claiming the credit for the first time are afraid they’re about to trigger an audit– or at least raise suspicion.

At the emotional level, I understand this apprehension. Having your company’s tax return scrutinized by IRS workers is about as enjoyable as a root canal or other unpleasant medical procedure.

As someone who spends a good amount of my day guiding clients through the financial “examination” process, I always tell them: “Yes, audits happen. However, if you’re taking an incentive for the first time on a timely-filed return, your odds of being audited are no higher than if you weren’t taking the incentive.”

Further, if you’re amending returns to claim credits that you didn’t previously realize you qualified for, you can expect your odds of being audited to rise. That’s logical since you are essentially writing a letter to the Treasury and asking for a refund.

But, by developing a sound methodology for calculating a credit and implementing a strategy that shows your information and documentation is improving over time, you will dramatically improve your ability to deal with an audit if and when one occurs.

If you’re claiming (or thinking about claiming), engineering-based incentives like the R&D Tax Credit, here are four key considerations to keep in mind:

1. The audit process isn’t as bad as you think

The IRS and state-level authorities have processes in place to make audits as smooth as possible. Once the lines of communication are open between an auditor, a taxpayer, and the taxpayer’s representative (likely their CPA and/or outside tax credit specialists), a plan can be established that focuses on three primary areas:

  1. Information needed.
  2. Desired format.
  3. Scheduling.

Most business owners and CPAs are extremely busy. Having an advocate on your team who is knowledgeable about the credit and the audit process will unsure the auditor doesn’t set unrealistic expectations.

Once the format of the audit is agreed upon, the auditor will issue an information document request (IDR), which will likely ask for workpapers, project lists, contracts, and other information related to the incentive being claimed by the taxpayer.

Response times are usually between 15 and 30 days, so while it takes some work to craft a response, it won’t necessarily be a huge distraction.

2. Auditors are human: Communication is key

Auditors have families, take vacations and deal with heavy workloads just like we do. Most are amenable to reasonable extensions when extenuating circumstances arise. I recall having to cancel a face-to-face meeting with an IRS engineer at the last minute — a meeting we had scheduled three months prior — because my wife was about to give birth to our youngest son.

The agent couldn’t have been more accommodating. As with most things in life, keeping the lines of communication open throughout the audit process is critical.

3. Make your credit process logical and defensible

Most of the questions posed during an audit, such as requests for workpapers, project descriptions, and supporting documentation, are routine. Remember, you or your client’s company are seeking a credit for which many businesses don’t qualify.

To mitigate unnecessary workplace disruptions and to increase the defensibility of their credit, many small business owners, CFOs and CPAs chose to partner with specialists in tax incentives and credits to perform a study and help improve a company’s internal processes.

As long as your study follows IRS guidelines and answers potential audit questions directly, you can feel confident and prepared to defend your position.

If partnering with a specialist, make sure the firm has a detailed understanding of the credit you’re seeking and has technical expertise that reaches beyond just your financials. Most CPAs will admit they don’t possess the technical understanding of their clients’ development activities or have the time to get up to speed once an audit is underway.

4. Don’t forget the appeals process

When seeking a credit, a business must sometimes work with an auditor who just doesn’t see eye-to-eye with the rationale presented for obtaining the credit. Auditors are typically overworked.

They tend to see things in black and white so they can get through cases as swiftly as possible. While the IRS does have engineers on staff who are familiar with R&D credits, those engineers have large caseloads and aren’t always available for audit assistance– especially on lower dollar credits.

On more than one occasion I’ve seen an auditor claim a company’s work didn’t qualify for a credit when a later appeal allowed the credit in full.

Unlike auditors who tend to look at everything in black and white, an appeals agent will review each matter holistically and will take into accounts the hazards of litigation. That means the agent will carefully consider the government’s chances of winning the case if it goes to court. In most cases the appeals process can yield a favorable outcome in which the taxpayer keeps a mutually agreeable amount of their claim through negotiation.


While audits can’t always be avoided, they don’t have to be scary. With proper planning, a sound methodology, and an experienced team working on your behalf, defending your position during an audit can feel like just another day at the office. If you or your clients have questions about qualifying for R&D tax credits, don’t hesitate to contact us.

Phil Williams is a partner at Tri-Merit, a professional services firm specializing in the calculation, documentation, and substantiation of R&D tax credits and other specialty tax services for companies of all sizes and across all industries. The firm’s partners conduct training at CPA firms across the country and speak often at accounting industry trade shows and conferences to help educate the profession. Contact Phil at or 847 637 5677 x128.