Best Practices: The IRS Wants to Interview My SMEs

Q: I am in charge of the R&D tax credit at my company, and the IRS is examining our claim. They want to interview our SMEs. Help! What should I do?

Jason Massie answers:

Don’t panic! You know your facts better than the IRS. You know which SMEs would make great interview witnesses. But first, let’s discuss why this is happening.

The IRS is behind in reviewing filed tax returns, amended returns, and refund claims. They have many senior employees who have retired over the past few years, which means taxpayers must deal with a group of new agents who are young or inexperienced. To make things easier and expedite exams, the IRS is short-cutting the normal Information Document Requests (“IDRs”) process, which can take months (or even years) by requesting to jump immediately into SME interviews. This is unfortunate, and we don’t recommend agreeing to SME interviews at the outset of an exam.

During the opening conference, we like to show off the work done by the taxpayer and provider (if one was involved). We want the IRS to know that everything they need was gathered during the study. We don’t recommend turning over the study. We find the volume of information in a study to be too much for the IRS to handle. Instead, we want the IRS to ask questions in the form of IDRs. This allows the taxpayer to respond within a certain time period, generally 30 days, with answers. It also allows you to engage with SMEs without the pressure of an interview.

The IDR path is preferable because you have time to track down SMEs for answers, whereas, during an interview, an SME might fail to remember the facts and could say something damaging to your claim. The IDR process gives you time to accumulate information needed to respond and also edit SME answers to the questions before they are turned over to the IRS.

If you have gone through several rounds of IDRs, and the IRS is still asking for SME interviews to clarify facts, then we recommend allowing the interviews. This generally isn’t the time to play hardball with the IRS, and they can subpoena SMEs if they want. Also, if you need to go to Appeals, they will not think highly of a taxpayer who denied exam the SME interviews if the interviews would have uncovered or clarified facts relevant to the claim.

Stay tuned to part 2.

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