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What is usually the biggest issue during an IRS review/audit when it comes to the Research and Development tax credit?

We have claimed the credit in the past, but haven't collected a lot of information or documentation. We anticipate coming under review soon and just want to be ready for what might be coming our way. This is one of the issues we're looking at. We haven't claimed much for the credit (approximately $80K each year).
Credits & Incentives Research & Development
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Ray Gering
This is a great question, and seeing as how the R&D credit is commonly reviewed during an audit, I'm glad to see that you're thinking ahead.

We have had a lot of experience in reviews, with small, mid and large companies, and the main source of strength you can have to support your claim is...documentation. Ideally, every company that claimed the credit would have in place a project/time tracking system that directly accounted for people's hours accordingly, not only for projects but for tasks within those projects. But this is seldom the case, which means that documents to support your credit claim can be hard to come by.

The main types of documentation that can support your claim through showing that a project or activity is qualified are what you might consider "formal" project documentation: test plans/results, prototype drawings, test calculations, etc. However, we have had measured success utilizing other documents such as email conversations (internal as well as with outside contractors), meeting minutes, and even sales presentations that describe the changes between one product model and another.

My overall advice would be to find documentation that directly addresses the four tests a project/activity must meet in order to qualify for the credit:

1. Technical uncertainty at the outset of the project/activity (you knew what you wanted to to do, but from a TECHNICAL standpoint you weren't 100% on how to accomplish it.

2. Process of experimentation: some type of iterative process that allowed you (or would allow you to) test different alternatives prior to arriving at a final design.

3. Based on the "Hard Sciences": documents that show how engineering, chemistry, physics, computer science were used.

4. New or Improved function, quality, reliability for a product or manufacturing process.

If you have questions regarding specific types of documents, or would like to let me know what kinds of documents you might be thinking about to get ready for review, please just let me know and I will try to help as much as I can.

Good luck!
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