Code Sec. 41 Research and Experimentation Tax Credit Audit Considerations

The Internal Revenue Code Section (“Code Sec.”) 41 research and experimentation tax credit was enacted in 1981 to provide a significant tax incentive to encourage taxpayers to increase domestic research and experimentation spending. However, recent IRS audit initiatives and procedures frustrate this goal, forcing many taxpayers to make a difficult business decision: claim the Code Sec. 41 tax credit as provided by Congress and face the almost certain prospect of a costly and time-consuming IRS audit, or forgo the Code Sec. 41 tax credit altogether. This article discusses the recent IRS initiatives and current audit procedures related to Code Sec. 41 tax credits. This article also explores the initial audit considerations and potential audit hazards that taxpayers encounter during Code Sec. 41 audits. Finally, an overview of the IRS’s research credit recordkeeping agreement program is provided