Discussion:R&D credit consultants

They appear to calculate previously unclaimed R&D credits, their fee being 10% of the refunds generated on amended returns, which they prepare.

Anyways, point being, from my limited experience so far, I would be very hesitant to recommend one to a client without doing extensive research on their situation myself.

I wouldn't work with anyone who charges a contingent fee in the R&D credit realm. First, that is one of the reasons that the IRS made it a Tier 1 issue and why it is one of the top 10 problem areas the Service faces (along with transfer pricing, listed transactions, etc.). The Service is using "super IDRs" for LMSB R&D credit studies and the first question is invariably "Did you employ someone to calculate the credit and, if so, was it a contingent fee?" (You can find a copy of the super IDR on PwC's website for a presentation on the R&D credit they did last May (I think).) Contingent fee R&D tax credit studies were a good part of what led the Service to almost entirely eliminate them. Second, the ability to use contingent fees for firms that employ Circular 230 practitioners will be virtually eliminated after March. If they're still charging contingent fees it means: (1) they do not employ practitioners, (2) they're a sales organization and an unknown third party is doing the work (think privity of contract), or (3) they're going to ignore Circular 230. None of those are good situations. Third, what assurance do you have that the consultants will prepare the amended return correctly? R&D specialists that come out of the Big 4 or the specialized R&D tax credit consulting firms tend to have very limited general tax experience. Or they tend to have adequate general tax experience but limited R&D credit experience. (But that applies to any specialty area in tax, like M&E studies, cost segregation, section 199, etc.) Fourth, assuming you and your clients are not turned off by the contingent fees (or they can get the work done by March), how are the contingent fees structured? Is it based on the credit generated, for example, on an 1120S or is it based on the actual refunds on the Forms 1040? Do they require prepayment or is payment only due after the Service has accepted and paid the refunds? Fifth, what will your client get other than an amended return? How detailed is the audit trail and what kind of audit experience do the consultants have? If your client is LMSB, well, reputable sources indicate that roughly one-third or half of the LMSB agents are working on R&D credit refund claims right now.

We have done several thousand R&D studies and have been through over a hundred R&D audits. I can say that most of the observations above about continget fee firms are true.

We always advise shareholders of pass-through entities about their AMT situation. You should never find out that you have large carry-forward credits after an R&D study is complete. AMT limitations should be known and discussed before any R&D study is started.

Let me know if you have any questions. I know all of the firms in the industry. We all pretty much know each other. Like any industry, you have the good, the bad, etc.