Research Credit Interview Procedures


Presented here is a suggested process for the conduct of the interviews of taxpayer employees or other knowledgeable individuals (interview subject) in connection with the examination of the Research Credit. Examiners should not that this is not a list of questions so much as a procedural framework for conducting the interview. It should also be noted that these procedures are intended to supplement and not replace the general interview guidelines of IRM (copy attached). Considering the unique nature of each individual taxpayer’s research activities and recordkeeping systems, it is not possible to draft a comprehensive list of questions, so this document concentrates on the process of conducting an effective interview rather than listing specific questions.

Before the Interview

The interview schedule and the “ground rules” for the conduct of the interviews should be worked out with the taxpayer in advance. Putting the “ground rules” in writing and making sure both sides have a copy can avoid misunderstandings when the interviews are conducted. This will allow both the taxpayer and you to be prepared to utilize the interview time efficiently.

The primary purpose of the interview is to gather factual evidence that will be used in determining whether a particular activity meets the definition of qualified research although information gathered during the interviews may also be useful in determining the cost associated with the activity.
In order for the interview subject to present his/her evidence and for you to be able to understand it, there has to be a level of interaction between the two of you that is free from unnecessary interference. To accomplish this objective, certain “ground rules” will need to be agreed upon prior to the start of the interviews.

Single Interviews – You should only interview one subject at a time so that you can have the level of interaction necessary for you to develop an understanding of the project. In addition, there should only be one interview subject in the room at a time.

Questions & Comments – It should be understood that the purpose of the interview is for you to obtain information from the interview subject and you would appreciate it if comments/questions by the taxpayer or their representatives could be held to the end of the interview to facilitate this. Make sure everyone understands that you don’t expect the taxpayer or their representative to be silent during the interview so some comments, questions, or clarifications are to be expected and that you will provide the taxpayer’s personnel or representative with an opportunity at the end of the interview to ask questions about, comment on or clarify anything that they feel needs to be discussed. Nevertheless, it is clear that you are not interviewing the subject if someone else is answering the questions on the subject’s behalf. Thus, it should be understood as part of the “gourd rules” that if the interview subject is not being allowed to speak for him-/herself or you are not being allowed to ask appropriate questions due to continual interference from the taxpayer or their representative, you will terminate the interview.

Drawings & Charts – You will need to ensure that responsibility for obtaining copies of any drawings or charts produced during the interview is clearly defined. Often security concerns will cause the taxpayer to want to take this responsibility. In the event that it is your responsibility, a 35mm camera with both a regular and panoramic lens is useful for taking a picture of anything drawn on a whiteboard/chalkboard. You should always take three of four exposures from different angles (to cut down on glare), have them developed as duplicates and give a set to the Taxpayer.

In addition to establishing “ground rules” for the conduct of the interviews, there are several other things that you will want to make sure are accomplished before you begin the interviews.

You should issue an IDR to obtain information about the interview subject before the interview. Items such as the subject’s Title, current position, position occupied at the time (if different), connection with the project, educational level, and prior work experience, will help you ascertain whether they were in a position to obtain relevant knowledge about the research. If you have questions about this, reviewing the information beforehand will allow you to address these concerns with the taxpayer prior to the interview.

Review any written documentation about the project that is already in your possession prior to the interview. This documentation should be brought to the interview so that you can ascertain whether it is complete. Having the documentation at the interview will also allow you to ask the interview specific questions about the content of the documents.

You should be familiar with the project and underlying technology prior to the interview. To gain this understanding, you may wish to independently research the project or underlying technology involved prior to the interview. Relevant copies of articles or documents consulted in this independent research should be brought to the interview. Being better informed about the project before to the interview will allow you to ask more cogent questions, use the time more effectively and minimize the chances that you will need to conduct a follow-up interview.

If either the taxpayer or the IRS wants to record these interviews, you should be aware that IRM contains specific requirements regarding recording. Regardless of whether the request to record the interview is initiated by the taxpayer or the IRS, the party requesting that the interviews be recorded must give the other party at least 10 days notice prior to the interview.

If possible, you should have another IRS employee present to act as a second note taker. A second note taker may catch something you missed while writing down an answer or while you were thinking about the next question you were going to ask. It is possible the taxpayer will want to use a stenographer to record the interview. If so, the taxpayer will need to pay for it in full unless some form of cost sharing is worked out with the taxpayer. Such an arrangement must be approved by management and a procurement contract issued prior to the start of the interviews. If a stenographer is used, their contract must provide for both the taxpayer and IRS to receive a copy of the transcript on a timely basis. You should be aware that the interview might involve technical terms that are outside the experience of the stenographer. If this is the case, you may want to work with the taxpayer in preparing a glossary of technical terms for the stenographer.

Conduct the Interview

Introduce yourself and your purpose in doing the interview. You should make sure that the interview subject is aware of the tax years that are under examination. You should also point out that in the case of a multi-year project, you will be emphasizing the work done in the years under audit although you understand that it may be necessary for the interview subject to talk about things that happened before or after those years in order to completely explain the project.

Remind everyone present about the “ground rules” and the fact that you are there to interview the subject and so would appreciate it if comments/questions by the taxpayer or the representatives could be kept to the end.

Ask general background questions about the interview subject. Although you have previously been provided with data such as their title, current position, position occupied at the time (if different), educational level, and prior work experience, you should go over it again since the subject may have something to add. What you are trying to determine is whether the interview subject was in a position to obtain relevant knowledge at the time the research was conducted. If the subject does not have first-hand knowledge of the research, determine how their relevant knowledge was obtained. You will need to determine whether the subject was directly involved in the research and if so, whether that involvement was as a researcher or a supervisor. If the subject was a supervisor, you will need to determine how many employees were supervised and what were their positions/functions. Do not hesitate to abbreviate or even terminate the interview if the subject has no relevant knowledge. For example, say the subject was not hired until after the years that are under examination. If this should occur, explain the reason for curtailing or terminating the interview to the taxpayer and offer them the opportunity to identify someone else that may have relevant knowledge. While you should be willing to interview people with relevant knowledge of the project, you should not waste the taxpayer’s time (or you own) interviewing someone who has no relevant knowledge.

You should ask what the interview subject did to prepare for the interview. One way to ask the question would be something like: “How did you (the interview subject) refresh your memory?,” “Did you talk to anyone else about this project in preparing for this interview?,” or “In preparing for this interview, did you refer to any documents or personal notes?”. If the interview subject indicates that they consulted any documents that have not previously been made available to you, you will want to secure copies and determine who prepared them. Under the IRM, you have the authority to accept oral testimony as evidence in making your determination. You will, of course, weigh it according to the reliability it possesses. It goes without saying that someone who has not had any way to refresh their memory of events that happened several years ago is, generally, not as able to relate as reliable an account of those events as someone who had access to notes or other documents made at or near the time of the events.

Have the interview subject describe the work on the project to you in chronological order. If the interview subject strays from the chronology, return to it in subsequent questions. The chronological approach is best able to illustrate the taxpayer’s status at the commencement of the project, what needed to be researched and the work undertaken to accomplish the goals of the project. Understanding the timeline is not only of benefit to you but also the Taxpayer. A discussion that is limited solely to what was discovered or what experiments were conducted is of limited value since they do not frame the discussion in terms of the research work that had to be done. The timeline will allow you to presume work was done at a particular point in time even if the Taxpayer neglects to mention it. For example, once you know the timeline, you will have a good feeling that to get from what was known in June 9x to what was accomplished in August 9x, required a particular type of work take place in July 9x even if the interview subject neglects to mention it. As the chronology unfolds, ask the interview subject what challenges, unknowns, hurdles, “show stoppers” they faced and how they went about addressing them. Follow-up to clarify responses such as:

Q: How did you address that problem?
A: We experimented.
Don’t stop here. Follow-up.
Q: Describe the specific experiments?
Q: How did you address that problem?
A: We already knew how to solve that problem.
You must Find out what the subject really means, so don’t
stop here. Follow-up.
Q: Explain what you mean by saying that you already knew how to
solve that problem.

Have the subject draw out any pictures, charts or graphs that will help clarify the project. Engineers by nature and by training may be more comfortable communicating with symbols and pictures than with words and you should take full advantage of this to gain the best understanding of the project you can. You will need to get a copy of any drawings or charts produced during the interview following the process that was previously worked out with the taxpayer.

If the interview subject mentions other people who are available and knowledgeable about the project, get their names and after the completion of the interview discuss with the Taxpayer whether it would be helpful to interview them. If the interview subject makes mention of documents, policy or procedure manuals, contracts or other types of documentation, ask both the interview subject and the taxpayer whether a copy of the document exists and how you can secure a copy of it.

Close the interview by asking the interview subject if there is anything he/she wants to add that they feel is important to your understanding of the project and was not covered in the interview.

Remember to ask if the taxpayer’s other employees or representatives have any questions.
At the conclusion of the interview, review your notes to see if there are any questions that you neglected to ask. Also, look to see if there were any documents or other potential interview subjects that were mentioned during the interview.

If asked for you opinion of how the interview went, you should not answer. You need time to review you notes as well as those of the other note taker (if none was present), digest what has been presented, and review any additional documentation whose existence may have come to light during the interview before you can develop a conclusion. You cannot express a “preliminary” conclusion since you should not have formed one until you have a chance to consider all the evidence.
Document and Evaluate the Interview

As soon as possible after the interview, review and organize your interview notes as well as those of anyone else who was taking notes on your behalf. Note any areas that require clarification and bring these to the attention of the taxpayer while they are still fresh on everyone’s mind.

Assess the information provided by the interview as well as any additional information whose existence was revealed during the interview and was subsequently provided. From this, you should make a determination whether the information presented, taken as a whole, is adequate to form a basis for a conclusion about the qualification of the activities. If it is not, address your concerns to the taxpayer; otherwise incorporate the results of the interview into your evaluation of the research activity as a whole.

IRM (05-14-1999)

Requests to Tape Record Interviews

1. Internal Revenue Code Section 7521 addresses audio recording of interviews.
2. Taxpayers – Taxpayers may request to tape record an interview proceeding as long as 10 calendar days advance notice of intent to record is provided to the Service. In addition, the taxpayer must supply their own recording equipment. The Service has the right to simultaneously produce its own recording and has the right to reschedule the interview if the Service does not or will not have equipment in place.
3. IRS – The Service can initiate an audio recording provided it notifies the taxpayer 10 calendar days in advance of the interview using Pattern Letter 2156 on Area Director letterhead. The Field Territory Manager must approve all Service initiated recordings. See Exhibit 3-1 for copy of pattern letter.
4. All participants must consent to the recording of the interview.
5. All recorded interviews will contain the following information:
a. The date, time, and place of the interview,
b. The taxpayer’s name and SSN/EIN,
c. Identification of all participants on the recording, along with a statement of each participants’s respective role in the proceedings,
d. The purpose of the proceeding,
e. The tax year(s) under examination,
f. A clear description of written documentation provided in support of the issues, and,
g. At the conclusion, a statement indicating the total recording time for the interview (i.e., time tape was running), and that the interview has been completed and the recording is ended.
6. The cassette will be labeled with the taxpayer’s name, SSN, year(s) examined, date of interview, total time of the recording and sealed in a manila envelope that should be stapled into the body of the workpapers. The Form 5344, Examination Closing Document will be marked at the top “RECORDED INTERVIEW CASSETTE ENCLOSED.”