10 Questions: Assessing the risk of SR & ED audit
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How safe are you with your next tax credit claim for scientific research and experimental development (SR & ED)? What makes you so sure ?
It’s a fact: There were more SR & ED audits and requests for information by the Canada Revenue Agency (CRA) in the last few years. Yet the law and the main circular CRA documentation has not changed. So why is it so ?
Why ?
Several factors explain this increase in audits :
- The CRA hired more research and technology advisors (RTAs),
- Interpretation of information circulars is more restrictive,
- The claim evaluation process is more rigorous.
Furthermore,
- Each year, 20% to 30% of the files are audited on average,
- Most new claimants are met by the CRA the first year,
- In recent years, the CRA has hunted down taxpayers and R & D consultants with exaggerated claims profiles.
This will not happen to me …
Many comfort themselves with ” wishful thinking ” such as:
- We have not been audited for several years,
- We got all our claims without problems, we have the “recipe”
- After the last audit, two years ago, they were granted the full amount claimed,
- It is a small credit, less than $ 100,000, this helps my chances of slipping under the radar.
Sorry to contradict you but that’s not the way it works.
10 SR & ED audit risk factors :
Several items can significantly increase your risk of being audited for SR & ED. Here are ten of the most frequent risk factors:
- You claim the same project SR & ED for over two years?
After two or three years the objectives and technological uncertainties should be resolved. Why is this project still being claimed SR & ED?
- You have not been audited for over three years?
On average, one should expect to be selected for an audit every three to five years, and even more frequently if there were problems at the last audit. From the fourth year your audit likelihood significantly increases every year. It will soon be your turn, even if your descriptions are amazing!
- The last audit was only financial, in fact, your final audit of the technical aspect dates … well, actually you do not remember.
See the previous answer. Don’t buy into by the fact that you were visited or answered financial questions. Research and Technology Advisors (RTAs) are very busy and they may very well postpone your technical audit for a year or two … only to come back the next year to review the last two or three years.
- “We were assessed and paid, so it was accepted. “
Look closely at the assessment notice you received from the Federal: what is written ? Is it that your SR & ED claim is accepted or that it is granted without revision, and subject to further revision ? The CRA reserves the right to return a year back or two, and even more if fraud is suspected.
- At the last audit, the audit technical report included recommendations. Did you follow them ?
At the conclusion of a technical audit, the RTA issues a scientific investigation report underlining its concerns and areas for improvement. Were you advised about nonconformities ? If you do not correct these situations before your next audit, you risk being penalized without any recourse …
- Your claimed expenses increased by over 25% in one year ? or more than 50% over two years?
Several financial factors will trigger an audit. The quick increase in costs claimed is the most common of them.
- At your last audit meeting was your RTA was it very old?
Several RTAs have retired in recent years. If such is the case with yours, the new one might have a brand new perspective on your claim.
- The main shareholders of your company are claimed as SR & ED for more than 30% of their time ?
- Several of your resources are claimed 100% of their time as SR & ED ?
These last two questions are clues to low cost segregation – or unsupported “optimization”. This kind of indication often deserves a visit to validate your methods to discriminate your SR & ED costs from the regular development costs.
- Who wrote your technical descriptions? Was it a new writer ?
A new writer often introduces the claim under a new light. The reader had developed an understanding. Seeing the new presentation can launch new questioning.
Even if your SR & ED claim is selected for an audit, you still can get all your credits. But it must then go through an extra process which in fact you could have done without.
You cannot avoid a SR & ED audit. However, you can minimize the likelihood of an audit.
What do you think ? Are you sure you will get all your credits without audit this year? Why did they come last time ?
