R&D Credit Analysis Results in a Clean IRS Audit

Challenge: When a three-year old life sciences company that had been claiming tax credits for its R&D expenses received a Notice of Audit from the Internal Revenue Service, they contacted RBF to double-check their approach before the auditors came knocking.

Background: Using summary totals from the general ledger, the company had been rolling up salaries, supplies and outside vendor costs under a general R&D umbrella, and recording that amount as a tax credit on prior tax returns.

RBF moved to review and analyze the company’s payroll files, lab notebooks, supplier transactions and subcontractor accounts. Among other findings, we determined that the science staff had not been using timesheets to record their time. Thus, there was no way to distinguish time spent performing R&D vs. non-R&D activities.

Solutions: Based on multiple discussions with the CEO and scientists centering on the content of their lab notebooks, we were able to re-classify a portion of the science staff’s wages to the more appropriate expense category of General & Administrative. In a similar fashion, some of the supply transactions that had previously been logged as R&D were re-classified to G&A.

Outcome: We amended and re-filed the company’s prior year tax returns, and put systems into place that would insure the proper classification of staff time, supplies and vendor costs going forward. A short time later, the IRS commenced auditing the company’s returns – no adjustments were made by the IRS to the company’s R&D credit claims.

RBF expertise employed:

  • Corporate Tax Planning and Preparation
  • Financial/Operational Consulting
  • Accounting

Timeframe: 7 weeks

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