Why Fear of Filing is Costing You
There are a lot of websites out there that say the same thing: the IRS is especially overbearing with the R&D tax credit. We’ve seen people post on LinkedIn and elsewhere that R&D tax credits almost always trigger an audit, or at least intense scrutiny, and is it really worth it?
That fear has been researched and documented: audit risk aversion, and it’s a measurably expensive fear. A 2025 study published in the Journal of Accounting and Economics by Mary Cowx, an accounting professor at Arizona State University, found that the threat of IRS scrutiny doesn’t just make some companies nervous about claiming the R&D tax credit, it has a negative effect on how much they invest in R&D in the first place. Companies aren’t just leaving behind credit dollars, they’re spending less on the research and development that would have generated those dollars.
Where This Research Came From
Cowx started her research with a client. Early in her career, she was brought in to help a company defend its R&D credit during an IRS audit at a time when the agency had flagged the R&D credit as a Tier 1 audit issue. This means that examiners were told to treat R&D credit claims as a high-priority area for adjustments. She described the documentation burden as enormous and the rules murky, which led to her ask other questions: how much does the expectation of IRS scrutiny change how companies claim, and how much does it affect the R&D they do in the first place?
What the Numbers Show
Using a sample of more than 8,100 firm-year observations across roughly 1,600 public corporations from 2008 to 2015, Cowx found that IRS enforcement spending is directly tied to lower R&D credit claims. Her estimate is that every additional dollar of aggregate IRS enforcement spending is associated with a $2.64 reduction in R&D tax credits claimed. Translated into elasticities, a 1% increase in expected IRS scrutiny is associated with a 0.4% decline in credits claimed and 0.2% decline in actual R&D investment.
These numbers are important to note not just because of the deterrent effect at the tax return point, but also the deterrent effect at the actual research and development at a company. The anticipation of needing to spend on defending a claim changes the investment decision itself, which means less innovation, and less progress.
Cowx followed up the archival analysis with a survey of 116 corporate executives, and the results point to the same conclusion with a different angle. Documentation burden and audit risk were consistently reported as major factors contributing to how much companies invest in R&D and how much credit they are willing to claim.
Why the Fear Exists
The R&D credit has a reputation problem, and at the surface level, it’s easy to understand why. Activities must meet the four-part test, expenses require contemporaneous documentation, and the mere mention of the IRS can cause a shudder. Recent changes to Form 6765 Section G that require detail on qualifying projects can seem overwhelming to those who had been claiming in the past and don’t know what that change means. Add an anecdote about R&D credit mills that got a company into a bit of trouble with the IRS, and it’s not hard to see why a CFO may think that not claiming at all is the safest option.
But shying away from the credit isn’t safe; in fact, it can be a different kind of cost, and a bigger one.
A company that qualifies for $200,000 in credits and doesn’t claim them hasn’t avoided any risk. It’s given up $200,000 of non-dilutive capital, capital that could’ve been used to hire another engineer or started a new research and development project. And if Cowx’s findings hold at the individual company level, it may also mean that the company invested less in the research that would’ve generated that credit to begin with.
Audit Risk is Manageable, but Lost Credits Aren’t
The distinction that gets lost in this fear is the one between a poorly documented credit and well-documented one. An IRS inquiry into a well-substantiated claim is a paperwork exercise; someone asks for records, you provide them, the claim holds. An inquiry into a poorly substantiated claim is a real problem. The fear of the credit shouldn’t be leading to not even trying, it should function as a filter for finding better documentation.
This is where the quality of who prepares the claim matter more than almost anything else. A rushed or generic claim built by someone, or a tool, that doesn’t understand the credit inside and out is the real risk.
What This Means for Your R&D Credit Decision
If audit risk is a determining factor in your decision to not claim the credit, or the reason you’re claiming less than you qualify for, the fix is not to stop altogether. The real fix is to close the gap between what you claim and what you can defend. This means:
- Documenting qualifying activities as they happen. This doesn’t mean overly scientific records are necessary, but even keeping notes throughout will be helpful.
- Tying wages, contract research, and supply costs directly to specific projects that meet the four-part test, rather than lumping them into a department-wide estimate.
- Working with a firm that specializes in R&D tax credits and stands behind its documentation rather than a generalist preparer bolting the credit onto a broader return. CPAs are invaluable but likely do not have the experience with such a nuanced credit like a specialized firm does.
The credit exists because Congress wants companies to invest in R&D. According to Cowx’s research, fear of the IRS is working against that goal, not just at tax time, but in the R&D work itself. That’s not a reason to sit out the credit, but instead a reason to get your documentation right.
