Confidential Records Used for R&D Tax Credit

The Bayer Corp. & Subs v. United States, Civil Action Nos. 08-693, 09-351 (W.D. PA 2010), court case shows how important it is to place information and security controls on information gathered when preparing a research tax credit.

The taxpayer in Bayer brought suit to challenge the IRS’s determination that it was not entitled to $50 million dollars worth of R&D tax credits. As part of this litigation, the government requested documents containing “confidential and proprietary information, trade secrets, commercial information, strategic planning information, commercial planning information, and commercial pricing relating to the sale, distribution and/or marketing of certain products.” This type of confidential information forms the basis of all R&D tax credits.

This type of information is usually the taxpayer’s most significant business asset. It is what sets the taxpayer apart from its competitors. In many cases, it goes to the very foundation of why the taxpayer is able to operate its business.

Yet, few taxpayers impose any limits on what information they make available to those who prepare their research tax credits. This is especially true on audit, given the prevailing approach of most taxpayers to provide everything to IRS auditors in an effort to substantiate R&D tax credits at the audit level.

In Bayer, the court found the government’s request to be reasonable. As the Bayer case demonstrates, taxpayers have to be careful what information they provide to the persons preparing their R&D tax credits and even to government auditors. There is an art to finding the balance between disclosing enough information to prepare and defend the research tax credit, and letting too much information be released to the public.