Preparing for an IRS R&D Tax Credit Examination

In brief

• IRS examiners look at three things: whether qualified research was performed on each business component, whether the expenses claimed are supported and allocated credibly, and, for the regular credit, the base amount.
• The IRS’s audit guides emphasise contemporaneous records and a clear connection between research activities and the costs claimed.
• Organised, traceable documentation makes it faster to answer questions. It does not guarantee the outcome.

What the IRS treats as research issues

These map directly onto the documentation a firm needs ready: the activities per component, the expenses and how they were allocated, and the base-period computation where it applies.

Business components and technical uncertainty

The four-part test applies to each business component separately (§41(d)(2)). Expect to be asked to identify the components, what was new or improved about each, and what was uncertain at the start: the capability, the method or the appropriate design (Treas. Reg. §1.41-4(a)(3)). For refund claims, the IRS already requires the components, the research activities for each and the QRE totals to be identified for the claim to be valid.

Process-of-experimentation evidence

Under §1.41-4(a)(5), a process of experimentation identifies the uncertainty, identifies alternatives, and evaluates them, for example by modeling, simulation or systematic trial and error. The evidence an examiner can test is the record of that process: what alternatives were considered, how they were evaluated, and what the results were, including approaches that failed.

QRE substantiation

• Wages: only wages for engaging in, directly supervising or directly supporting qualified research count (Treas. Reg. §1.41-2), allocated by time actually spent unless a more appropriate method can be shown.
• Contractors: generally 65% of amounts paid for qualified research performed on the taxpayer’s behalf, with agreements and invoices to support them.
• Supplies and computer use: used in the conduct of qualified research, with invoices and evidence of use.

The same guide describes a Tax Court case on substantiation, Eustace v. Commissioner, where a reconstructed list of salaries supported by employee testimony was found insufficient. We cite it only as the IRS summarises it; how any case applies to a claim is a matter for professional advice.

Consistency between narrative and numbers

Examiners compare the technical story with the figures. Inconsistencies are common sources of questions:

• a component described as experimental while most of the wages claimed for it relate to routine work;
• people named in the technical narrative who do not appear in the wage QREs, or the reverse;
• component names that differ between the study, Form 6765 Section G and the books;
• activity dates that fall after the start of commercial production;
• base-period QREs prepared on a different basis from the credit year (the consistency rule in §41(c)).

Documentation gaps

Gaps are better identified by the firm before an examiner finds them. For each component, note which elements rest on records made at the time and which on later recollection, and what was done to corroborate the latter. The RCCATG notes that “since a taxpayer is required to keep records to support the credit under § 6001, the Service does not have to accept either estimates or extrapolations”.

Evidence retrieval

Much of the cost of an examination is finding things: the ticket that shows the uncertainty, the build that failed, the person who ran the test, the invoice for the contractor. Records held in the client’s own tools can be lost when tools are replaced, repositories archived or accounts closed when staff leave. An index of what exists, where it is and which component it supports shortens every information document request.

Professional responsibilities

• Keep the four-part analysis per component with its reasoning and evidence references.
• Document the claim methodology, including any allocations and sampling, before filing.
• Be clear with clients about what the records do and do not show.

Evidence checklist

A practical list for organising records. It is a recordkeeping aid, not a test of whether work qualifies.

• A list of business components with the QREs claimed for each, matching Form 6765 (including Section G where filed).
• For each component, a written four-part analysis citing the records it relies on.
• For each person whose wages are claimed: role, components worked on, and how the qualified share was determined.
• Contractor agreements, invoices and evidence of the work performed, by component.
• Supply invoices and evidence of use in qualified research.
• Base-period records, if the regular credit is used, prepared on a basis consistent with the credit year.
• The claim methodology, any sampling plan, and how estimates were checked.
• An index of where each record is held, so information document requests can be answered quickly.

Where Evidante fits

Official sources

Grouped by what kind of source each is, because they do not carry the same weight. Checked on 11 Oct 2026.

Educational information only. Not tax or legal advice. This guide concerns the federal research credit; state credits have their own rules. Rules change and depend on the taxpayer and tax year; check the current IRS sources and take professional advice before acting. Evidante is not endorsed by the IRS.