How to Avoid the Mistakes in Kyocera: Building a Defensible R&D Credit Process

Why the Kyocera Case Matters for Tax Teams

The Kyocera AVX Components Corporation R&D court case is one of the most important cautionary tales in recent memory for companies pursuing the R&D tax credit. It showed that even a large, legitimate company with substantial research activity can lose an R&D credit claim if the process behind it does not meet today’s IRS expectations.

In this post, we will break down the key mistakes in the Kyocera case and offer practical steps your tax team can take to create a defensible R&D credit process.

What Went Wrong in Kyocera

Kyocera originally filed a modest R&D credit claim, then filed an amended return increasing the credit to $1.7 million after engaging PwC to perform a multi-year study.

But when the IRS audited the amended claim, several weaknesses became apparent:

• The study relied almost entirely on SME interviews, with no time tracking or contemporaneous project documentation.
• PwC did not retain original survey responses or interview questions.
• The company did not preserve supply or contract research invoices.
• Contemporaneous technical documentation was not produced during discovery.
• Business components were not well defined or substantiated.
• Upper-level management and other high-risk job titles were included without sufficient proof of their qualifying activities.

Ultimately, the court granted summary judgment for the government, and the credit was lost.

How to Avoid These Mistakes

The Kyocera case illustrates several process failures that any company can learn from. Here are six key areas to focus on.

1. Build a Documentation-First Process

One major failure in Kyocera was relying too heavily on SME interviews without supporting documentation. That’s no longer enough to support an R&D credit.

Instead, structure your process around the documentation your teams already create.

• Gather project artifacts—design documents, technical drawings, test results, and iteration logs.

• Save relevant emails, meeting notes, and project tracking data.

Use SME interviews to enhance this documentation, not replace it. For detailed strategies,  see Optimizing Your R&D Tax Credit Process Using Today’s Technology.

2. Select and Prepare SMEs Carefully

Not all SMEs are equipped to support an R&D credit study.

Follow these best practices:

• Choose SMEs with first-hand knowledge of qualified activities.
• Don’t ask them to speak outside their area of work.
• Train them on IRS expectations and how to clearly describe activities.
• Encourage them to reference technical documentation when possible.

See How to Train SMEs for R&D Tax Documentation for guidance on building a strong SME process.

3. Go Beyond Percentages

The IRS criticized Kyocera’s use of unsupported percentage estimates for employee time. That’s a red flag.

Instead, show:

• What specific work was performed.
• How it involved experimentation.
• How it meets the four-part test.

Encourage teams to describe activities in detail. Use project records to back up their input.

4. Preserve All Contemporaneous Technical Documentation

A key problem in Kyocera was the lack of real-time technical records. That gap weakened the company’s entire claim.

To avoid this:

• Set clear retention policies for key documentation.
• Coordinate with engineering, tax, and IT to track where records live.
• Don’t purge technical data that could support your claim.

Examiners are asking for this type of documentation more often—and not having it can sink your credit.

5. Define Business Components Clearly

In Kyocera, vague business component definitions made it hard to connect activities to the four-part test.

Improve your process by:

• Defining components at the right level of detail.
• Documenting the technical uncertainty and experimentation involved.
• Showing how each activity contributes to the component.

This requires tight coordination between tax and engineering teams.

6. Address High-Risk Job Titles Proactively

Certain job titles and departments are likely to face IRS scrutiny. In particular:

• Upper-level management is typically presumed to be engaged in direct supervision, not research.
• Support functions need clear evidence of how their activities contribute to qualified research.

If time is included in these categories, prepare robust documentation to demonstrate how the individuals performed qualified activities.

Why This Matters Now

The Kyocera case signals a broader shift in IRS expectations.

Recent cases and audit trends send a clear message: the IRS wants documented proof—not just SME recollections.

To stay compliant, taxpayers must show activity-level detail, link documentation to specific business components, and retain project records that back up their claims. Teams relying on outdated study models built around SME interviews and high-level estimates face growing risk.

Bottom Line

Kyocera makes the stakes clear. A strong R&D credit process depends on thorough documentation, SME input, real-time technical records, and cross-functional coordination.

The good news? You can improve your process. Companies that modernize their approach reduce risk—and claim more of the credit they’ve earned.

Want to review your current R&D credit process or explore ways to improve it? Contact us for a consultation.

Jamie Bond

As Director of Tax Credits at MASSIE, Jamie is dedicated to setting her clients up for success by delivering supportable work and focusing on building strong client relationships to ensure the best results. With over 11 years of experience in R&am...