Recent Developments in California Research Credit Audits
Since the California Research Credit Interested Parties Meeting (IPM) last October, we identified and evaluated opportunities to improve and streamline our research credit cases. The following reports what we've done since the IPM and clarifies our best practices related to examination of the California Research Credit.
Research Credit Best Practices & Federal Determinations
One area we looked at was our practices relating to federal determinations. Our best practices are outlined below:
- If the IRS audited the Research Credit, we will generally follow the federal determination. However, we may need to request information to determine how to apply the IRS analysis to California research. If the research activities reviewed by the IRS were substantially different from research conducted in California, we may need to examine California research activities.
- In addition, we may examine computational or state issues where California does not conform to the federal research credit. In these situations, we will need to request information, but remain cognizant of minimizing duplication of audit requests on taxpayers.
- If the IRS "no changed" the research credit in a prior year, we will generally accept the prior year IRS determination to the extent the activities and expenses from the prior year are the same or, substantially similar to, the activities and expenses claimed in the year under audit. In these situations, we may need to examine state issues where California does not conform to the federal research credit and remain cognizant of minimizing duplication of audit requests on taxpayers.
- If the taxpayer challenges the federal determination (believes the research credit amount is greater than the IRS allowed), it is the taxpayer's burden to show the federal determination was incorrect, and that they are entitled to more credit.
Research Credit Webpage Gets a Fresh Look
We updated and refreshed our external research credit webpage with a more user-friendly format. We included resources to assist in key aspects of the credit and to promote self-compliance.
Over the past year, we provided training and tools to staff to assist in understanding a taxpayer's business and awareness of the complexities of the issue. Currently, we are planning additional training.
A Collaborative Approach to Cases
With greater frequency, our research credit subject matter experts in Legal and Audit are working closer with the Audit staff to encourage a more consistent and accurate approach to research credit cases.
Lastly, we are proposing legislation to eliminate the current Alternative Incremental Method and conform to the federal provision to use the Alternative Simplified Method in computing the research credit. We held a stakeholders meeting on November 5, 2013, to obtain feedback on our initial proposal. We have incorporated this feedback into our proposals and will present the proposals to the FTB Board for approval on December 4, 2013.