Accounting firms serve as a trusted advisor to their clients. When clients come to them looking for answers on items they aren’t familiar with, such as the R&D Credit, the goal is to get them the right answer. Because accounting firms are tasked with knowing a lot of information about a variety of topics, niche areas of the tax code, such as the R&D Credit, are one of the most misunderstood areas of the tax code despite being one of the most lucrative incentives for business improving products, processes, or software in the U.S.
Misunderstanding the R&D Credit can result in improper elections being made, claiming an inflated credit for a client putting them at risk or leaving qualified dollars on the table that could impact a business now and expire in a short time frame.
There are a lot of companies providing R&D Credit services and you can learn a lot about a provider based on how they are paid. Providers who are paid on contingency fees end up taking home a percentage of the credits they identify for their clients, whereas a fixed fee is a fee that is based on a fixed quote of the amount of time it takes a company to complete the study. When it comes to contingency fees, on the surface it may seem like the better option. In reality, there are several things that come along with contingency fees that cause concern.
First, since the provider is taking a percentage of the credits identified, the incentive for the provider is to identify more activities and associated expenses regardless of whether the activities are qualified. In past releases of its Dirty Dozen list, the IRS says taxpayers need to be on the lookout for what it calls “Inflated Refund Claims” stating that “those preparers who ask clients to sign a blank return, promise a big refund before looking at taxpayer records or charge fees based on a percentage of the refund are probably up to no good.”
Second, the use of contingency fees violate Circular 230, which are regulations governing practice before the IRS. If a provider being paid on a contingency offers to defend their work under audit, they are in violation of Circular 230 meaning the client using that provider would likely have to pay additional dollars out of pocket for their credit to be defended.
R&D Credit providers that charge a fixed fee provide a safety net for accounting firms. When tax forms are filed, the accounting firm signs their name assuring that the information provided in the documents are accurate. However, if the R&D Credit is being performed by another provider, they need assurances that the credit being claimed is accurate. Having a fixed-fee R&D Credit provider not only protects the company claiming the credit, but it creates peace of mind to the accounting firm that the claim will be defended by an outside party given that the claim falls under audit from the IRS or state agency.