The following are miscellaneous tips to strengthen an R&D claim in anticipation of an audit by a taxing authority:
- Highly compensated employees and employees with upper-management titles - qualifying percentages for these types of employees will vary based on a number of factors. However, in the event of an audit by a taxing authority, QRE related to these employees will likely be scrutinized first as they tend to be low-hanging fruit and can substantially impact the overall R&D claim. It is important to ensure that the overall qualifying percentages for these employees make sense, and that their associated QRAs are well documented. As the burden of proof for substantiating an R&D claim is on the taxpayer, preparing for questions related to these types of employees from the onset is advised.
- Contemporaneous Documentation - it is extremely important to identify and retain documentation that supports the qualifying nature of the activities included in an R&D claim. Without adequate documentation, an R&D claim can potentially be disallowed. The good news is that the TaxTaker software retains these documents for you after they've been identified and uploaded. Alternatively, if a taxpayer does not want to upload potentially sensitive documentation, it is advisable to simply upload a Word/PDF document listing the types of contemporaneous documentation that exist along with file names and storage location. It is much easier to locate and retain these documents in conjunction with the R&D study than trying to cobble together documentation once an audit has begun.
- Changes in employee qualifying percentages year over year - these should be reviewed closely to understand the reasons for the change. If a qualifying employee was added in the claim year but performed similar activities in the base years, an adjustment may be necessary to remain consistent. Additionally, if a qualifying employee has a higher qualifying percentage in the base years than in the claim year, it's important to ensure this is correct as it could potentially negatively impact the claim year credit.