Self-Preservation: IRS

"When we quit thinking primarily about ourselves and our own self-preservation, we undergo a truly heroic transformation of consciousness." ~ Joseph Campbell

Defending every claim in tax return is the single most important skill for any tax preparer. This is why many accounting firms outsource the substantiation of R&D Tax Credit claims to firms like mine. But how do you know if the people preparing your taxes are reputable? How do you know they are able to perform what counts most? You don't.

That is why I think the IRS should rate tax preparers according to audit results. Crazy, I think not. I have been bouncing this idea off of people for the better part of a year now and the only objection to it that I hear is that this might create some liability for the IRS. My retort is there are already government agencies that rate companies on some metric. Most notably the Occupational Safety & Health Administration

OSHA publishes the safety ratings of almost any type of company you can think of. And if you think those safety ratings are insignificant you are wrong. Those safety ratings add another metric used to determine contract awards.

I am not going to try and spell out how the rating system would work in this simple blog; but, I think the key is to rate the tax preparer according to a simple scalable rating system on audit results.

If we the taxpayers could see a tax preparer's standing with the IRS, we would be a better educated consumer. This in turn would cause the tax preparers that play "audit lottery" with the IRS to be held more accountable than to just the company that they failed. In turn, fewer taxpayers would use those preparers in poor standing.

With fewer incorrect claims being filed tax revenue would likely increase. The increase in tax return accuracy would allow the government to downsize the number of IRS auditors. This is why I don't think the IRS would suggest such a system, Self-Preservation. Essentially, if there are more bad tax filings then there is more work for the IRS. More work for the IRS means job security. (Maybe this is why the tax code is so confusing to. Joking! sort of)

This is a general theme I see with the government agencies. Always expand rather than contract with improved efficiency. For those of you that think this is crazy or impossible give me your thoughts in the comment section below. Maybe it will ease my frustration or maybe I will light a fire under you to want a similar system. Either way it is progress.

PS

This self preservation theme is seen in other government agencies but there is one other that bothers me recently. The Department of Defense and their contracting officers. I will follow with that in the following days.

You Already Take the R&D Tax Credit

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” ~ Mark Twain

I have been talking to a lot of companies lately that have heard of the Federal R&D Tax Credit and many of them are already taking advantage of it. This is good. We need the companies that are driving technological development to grow by increasing R&D spending. Unfortunately for many of them, they are unaware of deficiencies in the quantification and subsequent substantiation of their R&D credit claims.

Controllers and CFO s tell me, "My accounting firm does that for me." or "We have been doing this for years and we haven't had a problem." These quotes often indicate to me that these people know falsehoods as a fact and it's not their fault. In the past, the R&D tax credit claim could be substantiated by any accountant but it is different now.

My frustrations with these statements have grown lately. I recently did work for one client that had a large regional accounting firm perform an R&D tax credit study and it was crap. The R&D credit study report just regurgitated information provided an individual who did not even have cursory knowledge of the four-part-test. Wages of technical writers, technicians, and management people were erroneously included in the calculation at 100%. No due diligence was performed to validate the company's raw data. Until, I did my work they had no idea how deficient their previous accounting firm had been.

And that is not an extreme case. I have seen firms apply blanket percentages of 5% to all of production and arbitrary number for CEO s that merely listen to R&D meetings. Their mentality is let's go after it all and if we lose 20%, 30%, even >40% in audit the company is still better off. But that is not true. Cash strapped companies can not afford to pay back adjusted claims plus interest and penalties. Staffing and budgeting are adjusted according to estimated tax bills and any adjustment can substantially hurt a company.

But from what I have seen recently, the people that work this way are not looking out for the best interest of their client. They are only looking out for their own interests. Unfortunately the penalty from the IRS gets assigned to the company and not the misleading, narcissist.

To avoid any problems, educate yourself on the R&D tax credit. Use resources like IRS.gov, Wikipedia, and Hull & Knarr. Look for specific IRS directives like the Tier 1 directive, audit guidelines, court cases, and position papers on each service providers website. This is the only way you can be sure what you know for sure is so.

State R&D Tax Credits

I don't have a way to make this topic an interesting read so I will be dry and bland when I write this (not that I am Dave Barry-esque in my other postings). I just want people to know that Hull & Knarr's website now has updated information on every State's R&D tax credit. You can get credit calculation methods, expiration dates, credit carry forward/back periods, limitation, and resource information. Please take a look for the information. I hope this becomes a good resource for you.

See I told you I am not Dave Barry.