R&D tax credit studies help companies secure cash from credits and incentives in recognition of their innovative products, services and activities. When a R&D study is well prepared, it represents a low-risk endeavor that usually generates a strong ROI for the taxpayer. However, when the study is not well prepared, it can be high risk and have a low ROI.
This podcast shares what to consider when selecting your R&D study provider to ensure you receive the best quality services at fair prices. It also revisits the relevance of Circular 230 as well as IRS guidance on amended returns, contrasting the approaches taken by a CPA firm and a boutique firm. Marty Karamon, Leader of Cherry Bekaert’s Tax Credits & Incentives Advisory Group, is joined by Ron Wainwright and Dan Mennel, both Tax Partners in the Firm’s Tax Credits & Incentives Advisory Group, to discuss the benefits of working with a CPA firm to perform your tax credits and incentives projects.
This podcast is the first in a series of episodes focusing on the news and nuances of tax credits and incentives for businesses.
View All Tax Services Podcasts
MARTY KARAMON: Welcome to the Cherry Bekaert tax podcast, focusing today on our Tax Credits and Incentives Advisory practice. My name is MARTY KARAMON, the national leader of this practice.
Every month, we highlight issues affecting the tax credits and incentives landscape. Examples include legislative and regulatory updates, marketplace trends, and managing tax credits and incentives engagements.
We will also discuss how technology affects the ability of taxpayers to claim C&I benefits and the drivers affecting taxpayer decisions to pursue these credits. Additionally, we will cover how to build a C&I practice and explore careers in the field.
Today, I am joined by my two partners in the Tax Credits and Incentives Advisory practice. Our work focuses on incentives specific to R&D, energy, and capital spend planning, primarily from a federal perspective with some state and local incentives.
Joining me are Ron Wainwright and Dan Mehl. Ron, how are you and where are you today?
RON WAINWRIGHT: I am doing very well, Marty. I am in Raleigh, North Carolina, which is home for me.
MARTY KARAMON: Excellent. Dan, how about yourself? How are you and where are you today?
DAN MEHL: I am doing great, thanks Marty. I am here in Silicon Valley, the heart of R&D for tech companies.
MARTY KARAMON: As we begin today, one issue many of our clients grapple with is how to choose a provider. We are in the marketplace talking to clients and proposing tax credits and incentives projects in a holistic way, taking into account their overall tax positions.
However, we often encounter clients who are approached by boutique firms. Over the last 10 years, there has been an increase in the number of boutique firms offering to prepare R&D studies.
Generally, these boutiques offer contingency arrangements ranging from 20% to 30% of the gross benefits identified. At Cherry Bekaert, we do things differently.
We spend time working with clients to scope out benefits before providing a formal proposal or budget, often on a time and materials basis with a cap. We do a lot of homework upfront before entering into a fee arrangement.
Ron, in the context of a CPA firm like Cherry Bekaert, we follow the rules under Circular 230. Could you give our listeners background on Circular 230, why it exists, and how it differentiates us from boutique firms?
RON WAINWRIGHT: This is a large differentiator between working with a firm such as Cherry Bekaert and a boutique firm. In 1921, the Treasury Department issued Circular 230 to govern the conduct of attorneys, CPAs, and agents representing clients before the department.
A boutique firm that is not a CPA firm is not governed by Circular 230. Substantial amendments were made in 2005 that established many well-known provisions for practitioners and clients.
Circular 230 contains rules of conduct for preparing tax returns and substantial positions within those returns. It provides six areas of guidance, three of which I will highlight today.
First, a tax return position must have a realistic possibility of being sustained on its merits. From an R&D perspective, this relates to Section 41 and Section 174 of the statute.
Second, a CPA firm cannot charge a client an unconscionable fee. While boutique firms often charge a contingency fee based on a percentage of the R&D credit claimed, we are not allowed to do that and work on a time and materials basis.
Third, one cannot solicit business using false claims under Circular 230. We see boutique firms making specific claims about their practices that would be considered false statements under these rules.
Circular 230 is a quality provision. Utilizing a CPA firm like Cherry Bekaert ensures higher standards in regarding the R&D credit as a whole.
MARTY KARAMON: Thank you, Ron. That sets the stage for why we operate the way we do. Dan, from your perspective, how does our approach as a CPA firm differ from a boutique?
DAN MEHL: Thanks, Marty. We view credits and incentives as part of our overall tax service offering rather than a one-off product. We work seamlessly with our compliance, audit, and advisory groups.
As Ron said, we never offer contingency pricing. We believe credit opportunities belong to our clients, not something we are giving to them.
Our reputation is built upon serving clients holistically and putting quality above maximizing the credit from the start. We ensure we have addressed any issues with the ability to monetize the credit.
This includes analyzing NOL positions or any concerns regarding the business structure. A boutique firm that does not understand complicated structures or the use of attributes cannot provide this level of service.
We ensure the client is aware of complex state deadlines and specific filing processes. We are hands-on throughout those deadlines to protect the client.
If we see practices that put a client at risk, we make proactive suggestions. For example, if we review a contract and see language around risk or rights that affects the credit, we let the client know for future renewals.
We also ensure accurate job descriptions exist. This helps clients work proactively with HR departments to mitigate risk during an IRS exam where job descriptions are frequently scrutinized.
MARTY KARAMON: To summarize, we view our role as a trusted advisor, looking beyond the credits to constantly improve. Boutiques often sell projects from a one-off perspective. Ron, what frustrations have we observed from clients who previously worked with boutique firms?
RON WAINWRIGHT: Quality is the top priority in our practice. When we prepare a return for a client who used a boutique firm, we perform a quality control review of that claim.
A major frustration is that we are rarely able to obtain an electronic copy of the IRS-ready deliverable from the boutique firm. We also find these firms often have inconsistent staffing, making it difficult to request information.
Many boutiques focus more on marketing than project delivery. We have seen scenarios where clients are subjected to civil penalties under Section 6676 for an erroneous claim for refund or credit.
This is a 20% penalty of the excessive amount of the R&D credit claim. Because boutiques are paid a percentage of the credit, they may take aggressive or incorrect tactical positions.
We have seen them incorrectly elect the traditional credit over the Alternative Simplified Credit method. Mistakes also occur when calculating the credit during acquisitions and dispositions.
Section 41 has specific rules for realigning base years during an acquisition or disposition. Boutiques also struggle to assess credit viability among portfolio companies in a private equity context.
In reviewing amended returns, we have seen boutiques that do not understand how to file a partnership return under the BBA regime or utilize Administrative Adjustment Requests. Disclosures required by the IRS are also frequently handled incorrectly.
Under the Employee Retention Credit (ERC) provisions of the CARES Act, they often fail to account for qualified research expenses correctly. You are not allowed to double-dip between these two benefits.
A provider loses objectivity when they are paid a percentage of the credit they claim. Circular 230 explicitly states that a provider cannot be in a conflict position.
The erroneous claim penalty has been applied significantly across boutique firms we have reviewed. Quality is the ultimate differentiator beyond Circular 230.
MARTY KARAMON: I was on a call yesterday where a boutique firm told a client that IRS guidance was only there to terrify taxpayers and should not be respected. That is disturbing advice.
The IRS recently issued rules specific to claims for refund in the R&D context. Some believe these rules are a direct response to the increase in claims filed by taxpayers using boutique firms. Dan, what does this new IRS guidance require?
DAN MEHL: Many clients find out they were paying a premium for lower-quality work when we take over. The new IRS guidance for amended claims requires three main points.
First, taxpayers must identify all business components to which the Section 41 research credit claim relates for the year. Second, for each component, you must identify all research activities, the individuals who performed them, and the information they sought to discover.
Third, you must provide total qualified employee wages, supply expenses, and contract research costs for the claim year. All of this can be done on Form 6765.
RON WAINWRIGHT: The Chief Counsel Memorandum issued on October 15, 2021, ensures these elements are followed. Boutique firms often use the statute and regulations as broad guardrails rather than actual law.
We did not find anything in the memorandum that was not already in the statute or regulations. However, the memorandum caused a stir in the boutique firm community.
I recently read an article by a large boutique firm arguing against these requirements for amended returns. They were essentially arguing against the tax law and its established interpretation.
The R&D credit has been permanent since 1981 and has a long history of court cases. It can be complex and is often misunderstood regarding the underlying regulations.
Our practice delivers an audit-ready deliverable. In the event of an examination, we stand behind our work 100%.
We embed the provisions of the Audit Technique Guide into our deliverables. We have not found this practice within our quality control reviews of boutique firms across the country.
Taxpayers should be aware that these rules are in effect for any amended returns filed after January 10, 2022. Ensuring alignment with the Chief Counsel Memorandum is critical.
MARTY KARAMON: Any firm that does their homework has nothing to be afraid of. I view this as an opportunity to differentiate our work from providers who do not disclose information properly to the IRS.
Thank you, Dan and Ron, for your insights. This material is presented for informational purposes only and is not intended to provide tax, legal, or accounting advice.
You should consult your own advisors before engaging in any transaction. Check out the Cherry Bekaert website at cbh.com for the latest guidance and resources on credits and other business topics.
Please like, share, and subscribe. Thank you for listening.
