The United States v. Goertz, No. A-09-CA-179 LY (W.D. Tex. 2010) case highlights why defending R&D tax credits on audit is often frustrating for taxpayers and the government alike. The short answer, is that it comes down to documentation.
The court case does not say why the taxpayer’s research tax credit claim was denied. That is the very issue raised by the taxpayer in court. The taxpayer, like many other taxpayers, is in court to ask why its claim was denied and to assert that its claim should be allowed. On the other side, the government is asking the court for permission to depose (which is lawyer speak for interview) more than the permissible number of witnesses. Thus, it seems that the government attorneys have the same question as the taxpayer.
There is the catch 22. Research can (and does) happen even if there are no records that chronicle the events, and IRS auditors cannot allow R&D tax credit claims without reviewing records and other evidence.
In the Goertz case, the court denied the government’s request to depose additional witnesses and it ordered the government to provide the taxpayer with an explanation as to why its R&D tax credit claim was denied. The court went on to say that “need not provide its answer employee-by-employee or project-by-project.” Thus, it sounds like the taxpayer will still not know why the government is questioning its research tax credit.