When you’re notified that your research and development (R&D) project is being audited, you want to feel prepared from the get-go, rather than overwhelmed or stressed. The auditing process can often be drawn-out and lengthy, meaning you should ensure you’re prepared from the day your R&D project begins.
Having safeguards in place earlier in your R&D project, such as thorough documentation, can be beneficial if the auditor raises any questions or concerns. In this blog, we examine the nuances of R&D audits, and how you can be organised from the start.
What is an R&D Audit?
An R&D audit is when someone examines how well your business complies with the relevant R&D tax requirements. This person or persons comes from the organisation or governing body where you applied for your R&D tax incentive, such as the Australian Taxation Office (ATO) if you’re based in Australia or the Internal Revenue Service (IRS) for US-based organisations.
During an R&D audit, the auditor will conduct a thorough review of your documentation, such as your R&D project’s records, evidence and expenses. This helps the auditor paint a detailed picture of your R&D project, enabling them to identify where your project doesn’t meet R&D tax incentive requirements.
The organisation or governing body doing the audit will contact you to say they are going to examine your R&D project and processes. They may or may not outline the areas of concern in your R&D project in advance.
During the investigation, the auditor might ask for specific documentation and statements, or they might interview you to glean additional information. Once the audit has finished, the auditor will provide you with the outcome. Depending on the outcome of the audit, the auditor may reevaluate your R&D project again, either 6 or 12 months from the initial review.
Why You Might Be Audited
There are a number of reasons why the governing body or organisation wants to audit your R&D tax incentive claim. If you’re due for a large refund or rebate, the governing body or organisation might want to ensure that you’re accurately connecting your spending with R&D activities.
When you own multiple businesses that have applied for the R&D tax incentive, the organisation or governing body’s database might consider this a red flag. If this happens, the auditors will want to investigate all your businesses to ensure they’re complying with R&D tax incentive requirements.
Should you use an R&D adviser that lacks experience or has a history of failed audits, then the auditor might question the value of your R&D project and its eligibility for the tax.
What You Need for Your Audit
Being proactive in your R&D project from the very beginning is paramount for a smooth and successful audit. Ensuring that all types of documentation – from your research evidence to financial statements – is managed from the start can have a positive effect on your audit. It empowers you to corroborate your claim for R&D tax rebates with evidence from your R&D project.
Utilising various programs and systems to bolster your resource management and tracking can prove beneficial during an audit. This enables you to provide accurate and reliable information to the auditor when prompted. When using software to track various aspects of your R&D project, it streamlines the reporting process significantly and can aid with providing relevant evidence to the auditor.
Some of the data you might have to provide ranges from financial statements, such as wages and project expenses, to project management information, including timesheets and specified personnel.
You should also keep detailed records of each stage of your research, from hypothesis revisions to result evaluations. Should your auditor request this type of information, it is vital to present a comprehensive account of the ongoings of your R&D project.
Consult a Specialist
When in doubt about how best to collect and present your evidence to an auditor, you can consult and work with an R&D tax incentive specialist.
Choose a consulting firm that has a wealth of experience with successful R&D audits and are familiar with the nuances of the R&D tax incentive. A professional R&D tax incentive specialist can support you to collate the relevant information to help determine your R&D tax eligibility, as well as aiding you during an audit.
If you need assistance with preparing for your audit, or you wish to learn more about R&D management, please get in touch today. Our team of experts can guide you and help you enhance all facets of your R&D project management, including audit preparation.
