Best Practices: IRS Scrutiny on R&D Tax Credits: How to Protect Your Claim in 2025

The IRS is tightening its grip on R&D tax credit claims, and companies need to be prepared. With increased audit activity, stricter documentation requirements, and new IRS review processes, businesses that fail to comply risk denied claims, delayed refunds, or costly disputes.
If your company relies on R&D tax credits, here’s how to reduce audit risk and protect your claim in 2025.

Why Is IRS Scrutiny Increasing?

Over the past few years, the IRS has ramped up its focus on R&D tax credit claims due to concerns over:

• Incomplete or vague documentation that doesn’t fully support research activities.
• Overly broad business component definitions that lack the required level of specificity.
• Misclassified expenses, particularly around wages, supplies, and contract research.
• A surge in refund claims, leading to heightened IRS review processes.

The IRS is determined to eliminate weak or inflated claims, and that means CFOs must take compliance more seriously than ever.

Common IRS Red Flags That Trigger an Audit

If your company is claiming the R&D tax credit, be aware of these red flags that could increase your audit risk:

1. Weak Business Component Documentation
Problem: If your claim groups multiple projects under a vague business component category, the IRS may challenge whether they truly qualify.
Solution: Clearly define your top 50 business components with specific research objectives and documented results.

2. Lack of Process of Experimentation Evidence
Problem: The IRS requires proof that companies followed a structured process of experimentation when conducting research. If documentation is missing, claims could be disallowed.
Solution: Maintain real-time records, including design iterations, test results, engineering notes, and data analyses.

3. Misclassification of Wages and Expenses
Problem: The IRS is cracking down on improperly categorized QREs, especially employee wages. If costs aren’t allocated correctly to specific research activities, the claim could be denied.
Solution: Ensure wages, supplies, and contractor costs are properly categorized by business component on Form 6765.

4. Filing a Refund Claim Without Proper Documentation
Problem: The IRS has introduced a new Classifier system, where refund claims are reviewed before they even reach an examiner. If key details are missing, the claim could be denied outright.
Solution: Before filing, make sure you can provide:

• A complete breakdown of business components.
• A clear explanation of what each research activity sought to discover.
• Detailed records of who performed the research and their role in the process.

How to Protect Your R&D Tax Credit Claim in 2025

To stay compliant and reduce the risk of an IRS challenge, follow these best practices:

1. Conduct an Internal Compliance Review
Before filing, review your claim as if you were an IRS examiner. Make sure:

• All business components are properly defined.
• Documentation fully supports the claim.
• Expense tracking aligns with Form 6765’s new requirements.

Pro Tip: Have an R&D tax credit specialist conduct a risk assessment before submission.

2. Implement a Real-Time Documentation Process
Many companies fail IRS audits because they rely too much on interviews and lack contemporaneous documentation.
Set up a structured system to document research activities in real time.
Ensure all evidence aligns with the scientific method required for R&D tax credits.
Track expenses as they occur to avoid issues later.
Pro Tip: Train engineering and finance teams to document research as it happens rather than reconstructing it later.

3. Consider a Pre-Filing Agreement (PFA)
If your company claims large R&D tax credits annually, a Pre-Filing Agreement (PFA) can provide IRS-approved certainty before filing.
The IRS will review and approve your methodology in advance.
Reduces audit risk and minimizes disputes.
Provides long-term security for your R&D tax credit claims.
Pro Tip: A PFA is ideal for Fortune 500 companies or enterprises claiming significant R&D tax credits each year.

Be Proactive, Not Reactive

The IRS is more aggressive than ever in reviewing R&D tax credit claims. Companies that fail to adapt to new compliance requirements, Form 6765 updates, and increased documentation standards could face denied claims, audits, or penalties.

Need expert guidance? MASSIE’s R&D tax specialists can help you navigate these changes and secure your tax credits.