The legal standard for what qualifies as R&D under Section 41 has not changed. The four-part test is still the four-part test. A qualified business component must involve a permitted purpose, eliminate technical uncertainty, follow a process of experimentation, and be technological in nature. None of that is new.
But the way IRS exam teams are conducting examinations has shifted meaningfully, and companies going into audits with documentation that would have been sufficient a few years ago are finding it is no longer enough. What follows is what practitioners working active R&D credit examinations are seeing from exam teams right now.
Less Inference, More Direct Evidence
The biggest practical change in how examinations are being conducted is this: IRS examiners are significantly less willing to connect the dots for you. Under the older approach, you could present a project summary, a list of employees involved, and an allocation of wages and expenses. The examiner would use reasonable inference to connect those materials to the activities required under the statute.
That approach is breaking down. Exam teams are requiring more direct substantiation: documentation that does not just describe what a project was, but demonstrates specifically how the work satisfies the process of experimentation requirement. That means contemporaneous records. Lab notebooks, design iteration logs, test results, technical reports, software commit histories with meaningful annotations, engineering meeting notes where uncertainty and alternative approaches were discussed. Not reconstructions prepared after the audit notice arrived.
This is a real and significant shift for companies that have historically relied on employee interviews and retrospective project summaries as their primary documentation. Those approaches can still be part of a complete study. But practitioners are clear that they are not sufficient on their own anymore. Examiners are pushing back, and they are doing it early in the examination.
The Process of Experimentation Standard
Most disputes in R&D credit examinations ultimately focus on the process of experimentation standard. The statute requires that the taxpayer have systematically evaluated alternatives: tried an approach, assessed the results, and used that information to decide what to do next. The research must be directed toward eliminating technical uncertainty about the capability or method to develop or improve the business component.
For traditional laboratory or hardware R&D, that standard maps naturally onto the kind of records scientists and engineers produce in the normal course of work. For software development and iterative processes, it is harder to demonstrate, not because the work does not qualify, but because the standard documentation artifacts from modern development environments do not always tell the story the IRS is looking for.
Sprint retrospectives are not process-of-experimentation documentation. A Jira ticket that says “implement authentication module” is not a technical uncertainty record. Companies that rely heavily on software development as their qualifying activity need someone, typically an engineer or technical project manager rather than a tax professional, to articulate what the uncertainty was, what alternatives were considered, and how test results informed subsequent decisions. That narrative has to be captured during the project, not constructed afterward.
Individual-Level Documentation
Exam teams are also pushing harder on employee-level substantiation. Stating that the engineering department spent 40% of its time on qualified research is no longer enough. Examiners want documentation of what specific individuals did, why those specific activities qualify under the four-part test, and how the time and expense allocations for each person were determined.
This is not simply an administrative preference. It reflects how the IRS has been building its examination approach for years, and it is now baked directly into Form 6765 Section G, which requires wage allocations broken out by individual activity type: direct research, supervision, and support, for each business component. The examination standard and the new form are pointing at the same requirement.
Approaches to individual-level tracking vary by industry and company size, but the principle is consistent: you need to know what each person who contributed to a business component actually did, and that record needs to have been created close to when the work happened. We have written in detail about how to find and document every QRE across different employee and expense categories.
Software Development in Financial Services
Software development claims in financial services are drawing particularly intensive examination scrutiny right now. Banks, investment management firms, and fintech companies that claim R&D credits on software development work are among the most likely to face examination, and when those examinations open, they tend to be thorough.
The core difficulty is that modern financial technology development, with its agile sprint cycles, continuous integration, and iterative feature deployment, does not map cleanly onto the IRS’s traditional conception of research. A two-week sprint where the team evaluates three alternative approaches to a risk calculation, chooses one, builds it, and determines in the next sprint whether the approach worked is a genuine process of experimentation. The uncertainty is real. The alternatives are real. The outcome was not predetermined.
But that process is not self-documenting in the way that laboratory R&D tends to be. Building the documentation infrastructure that captures technical uncertainty, alternative approaches, and experimental outcomes requires intentional effort, and it has to happen during development. By the time an examination notice arrives, it is too late to reconstruct it.
Amended Return Claims
One additional area under close examination attention: R&D credit claims on amended returns. Since June 2024, any amended return claiming an R&D credit refund must include business component identification, individual activity descriptions, and QRE breakdowns at the time of filing. Claims that do not include that information get returned as not perfected, with a 45-day window to provide the missing documentation. The perfection transition period runs through January 10, 2027.
This matters for companies that have been filing amended return claims for prior years to capture credits they originally missed. The documentation requirements that apply to those claims are essentially the same as what Section G will require for original returns starting in 2026. If your amended return documentation is not at that level, you should expect a perfection request.
Getting Ahead of This
The consistent thread across all of these shifts is that the IRS wants documentation that was created in real time, at the project level, with enough specificity to demonstrate that each claimed activity satisfies the four-part test without requiring inferential leaps. That is a higher standard than many companies have maintained historically.
Want to talk about where your documentation stands against the current exam standard? Reach out. We would love to take a look.
September 24, 2026
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