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:: Credit for Increasing Research Activites - Sampling
Methodologies
8.
SAMPLING METHODOLOGIES
In certain
cases, use of sampling
methodologies may be a desirable
examination tool. Sampling is
quite often used in research
credit cases for greater audit
efficiency. In fact, sampling
should be considered in a
research credit case whenever
excessive amounts of time or
resources are anticipated in
examining all of the taxpayer’s
expenses or projects.
We are aware of
instances where statistical
sampling has been employed to
determine eligibility of such
items as qualified wages,
supplies, or contract services
in the preparation of a tax
return or claim. The Service’s
position of the application of
such method is as follows:
Under
Treasury Regulation §
1.41-4(d), a taxpayer
claiming the research credit
must retain records in
sufficiently usable form and
detail to substantiate that
expenditures claimed are
eligible for the credit.
Guidance on record retention
is set forth in Treasury
Regulation § 1.6001-1. If
statistical sampling methods
are discovered as the basis
for determining return
preparation or Claim filing
amounts, the validity of the
statistical sample must be
confirmed by a CAS. Also,
the scope or depth of the
examination is not limited
to the statistical sample
items. The proper nexus
between qualified expenses
and activities must be
established. The examiner
is still entitled to request
and receive records that
will sufficiently
substantiate all expenses
and activities to which the
credit claim relates, even
if it is outside of the
records maintained for the
sample itself.
When a sampling
technique is contemplated, the
examiner, along with a CAS,
should meet with the taxpayer
and design a sampling plan that
will result in an acceptable
number of items to examine. The
formulation of questions,
questionnaires, or surveys to be
used should be customized to
each taxpayer’s specific
circumstances. Specific
sampling procedures should be
thoroughly documented. While a
judgment (non-statistical)
sample will often require less
examination work than a
statistical sample, a judgment
sample generally requires
taxpayer assent as to how
results the judgment sample
results will be applied, while a
valid statistical sample does
not. Agreement between taxpayer
and examiner should be
negotiated in the early stage of
the examination, and should
generally be set forth in a
closing agreement (Form 906),
binding the parties to apply the
results of the agreed-upon
methodology. Local counsel can
provide assistance in the
formulation of closing
agreements.
If agreement
is not secured, the taxpayer and
the Service may not be bound to
adhere to the sample results.
Thus, if a taxpayer initially
agrees to the use of a
non-statistical sampling
methodology and later objects,
absent a closing agreement, any
adjustments based upon the
judgment sampling methodology
may not be sustainable in
court. For this reason, it may
be necessary to apply
statistical sampling in cases
where the parties cannot agree
on an appropriate judgment
sample or sampling methodology.
It is
important to note that the use
of such alternative sampling
methodologies may be limited, as
in the case where a taxpayer has
filed a claim for refund that
may be subject to Joint
Committee Review. Therefore, it
is critical that examination
methods are carefully assessed
and selected based on
appropriateness to the type of
activities, accounting systems
and records maintained by the
taxpayer on a case-by-case
basis.
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