1. What is an R&D tax credit audit, and what does it involve?
An R&D tax credit audit is an examination of compliance with the relevant R&D tax credit legislation, and it consists of a thorough review of the claim from both a scientific/technological and a financial/tax technical perspective. To be eligible for the credit, a company must be able to demonstrate that the claim satisfies the following two tests, which typically form the basis of the audit:
- The Science test: Are the claimed activities consistent with the statutory definition of R&D activities and is there sufficient supporting documentation? This review is generally carried out by a relevant technical expert appointed by Revenue.
- The Accounting test: Is the expenditure claimed for the R&D activities correct? Has the company maintained a record of expenditure incurred in carrying out the R&D? This test is generally conducted by a Revenue inspector.
Claimants must ensure that they maintain records to satisfy both of the above tests. KPMG can help ensure that you are best placed to pass the above tests and that you have the necessary documentation in place.
2. How likely am I to be audited?
Due to Revenue’s extensive audit programme, we advise our clients that it is most likely a case of “when” not “if” you will be audited. We understand that the Revenue audit selection process has now been divested to the Districts rather than being centrally controlled by Revenue. This may be a sign that R&D tax credit Revenue audits may increase significantly. KPMG can advise you on your R&D tax credit claim and on the best way to be prepared for an audit.
3. I have received my credit/cash refund, why does an audit matter?
Revenue reserves the right to audit an R&D tax credit claim for up to four years after the return has been filed. Claimants often mistakenly believe that their claim has been accepted by Revenue because a credit has been deducted from their corporation tax liability or they have received a refund in respect of the claim. However, it is important to note that a claim is generally not accepted by Revenue until they have concluded an audit of the claim.
4. What should I do to be best prepared for an audit?
The best way to prepare for a Revenue audit is to make sure that your claim has been compiled in accordance with the appropriate legislation, Revenue guidelines for R&D tax credit (February 2011), ebriefs, tax briefings and best practice. It is critical that you review whether it is likely that the claim would meet Revenue’s requirements under audit and consider whether appropriate action should be taken. In this regard, it is advisable to seek professional advice.
5. How do I protect the confidentiality of my R&D activities during the audit?
Revenue will generally appoint an external technical expert to review the claimed R&D activities from a scientific/technical perspective. The appointed individual reports to Revenue whether, in his or her opinion, the activities examined constitute R&D activities as defined by the legislation. Before disclosing any information to the technical expert, Revenue should:
- Notify the company of the identity of that person and of the information that it intends to disclose
- Obtain a signed confidentiality agreement from the expert.
Also, the claimant may object to the use of a particular expert where it can demonstrate a genuine conflict of interest.
6. What are the potential implications of an R&D tax credit audit?
If your claim is found to be overstated (whether the error is innocent or otherwise) and/or you have insufficient documentation to substantiate either the activities carried out or the expenditure incurred, you may face repayment of part or all of the credit. Also, Revenue may seek interest, as well as penalties and – in extreme cases – there is a risk of publication. KPMG’s R&D tax credit team can help ensure that your claim is best placed to successfully withstand a Revenue Audit.
If you are concerned about the robustness of your claim or about an upcoming audit, please contact us.