Too Good to Be True? The Hidden Risks of Pursuing Sketchy R&D Credit Claims

by | Jun 30, 2025 | Federal Tax, Main Tax Min, Tax Minimization, Tax News | 0 comments

If it sounds too good to be true, it probably is–especially when it comes to R&D tax credits. Before you chase big refund estimates, make sure you’re not stepping into a compliance minefield.

By Mark Dunning and Jamie Overberg

There’s a trend in the marketplace right now to inflate R&D tax credit claims pushed by aggressive vendors—including some large, reputable firms. Taking risks like these have serious, real-world consequences, especially for unsuspecting companies.

Taxpayers can benefit from some practical advice to help select the right R&D credit vendor, one who will ensure compliance and help you avoid costly IRS audits.

How Vendors Inflate Claims

With IRS staffing historically low and audit rates perceived to be declining, some vendors have seized the opportunity to push exaggerated R&D claims. These firms—often including well-known national or Big Four accounting firms—entice businesses with promises of doubling or even tripling their credits.

But as Mark Dunning, partner at TaxOps Minimization, warned, “They think the risk is going down so, they don’t feel they need to do a correct job on their tax returns.”

To justify larger credits, some vendors include roles and expenses that clearly fall outside the scope of qualified R&D activities. These may include:

  • Sales and marketing personnel  – Despite the tax code explicitly excluding these functions, some vendors still claim 100% of their wages under the guise of “technical sales” or “market research.”
  • Accounting and administrative staff  – These roles may support R&D teams but their work is typically classified as general and administrative, which is not eligible for the credit.
  • Process engineers performing routine operations  – While process development can qualify, routine maintenance or production support does not. Yet, vendors often overstate the qualifying nature of these activities.

While certain positions—like testers or solutions engineers—may qualify for partial inclusion if they directly support R&D efforts, many vendors apply a blanket approach, claiming 100% of wages or time without proper documentation or analysis. This not only inflates the credit but also exposes the company to significant audit risk.

“That’s where the aggressive positions come in and start to make us cringe. It’s not just about stretching the rules—it’s about ignoring them entirely in some cases,” Mark said.

The problem is compounded when vendors fail to differentiate between qualified research activities and supporting or managerial functions, leading to inflated claims that won’t hold up under IRS scrutiny.

This practice may temporarily boost a company’s credit, but it undermines the integrity of the claim and can lead to costly consequences when the IRS comes knocking. This practice may temporarily boost a company’s credit, but it undermines the integrity of the claim and can lead to costly consequences when the IRS comes knocking.

This practice may temporarily boost a company’s credit, but it undermines the integrity of the claim and can lead to costly consequences when the IRS comes knocking.

The Illusion of Safety with Big Firms

Many businesses assume that working with a large, reputable firm—especially one of the Big Four—automatically ensures compliance and insulates them from risk. This belief is not only misleading but potentially dangerous.

Some companies are lulled into a false sense of security simply because of the brand name attached to their tax filings.
“They feel that they can get away with it because they’re a “big”  international firm,” Mark said.

But the reality is that vendor size has nothing to do with immunity when credit claims exceed what is allowable under the law. The size of a firm also has no bearing on whether their practices are compliant.

Some firms use their reputation as a shield while pushing the boundaries of what qualifies for the R&D credit. They may include unqualified roles, inflated time allocations, or the application of overly broad interpretations of the tax code—all in the name of delivering a bigger credit – while you pay their hourly fees for defense (for many years!) when the credit claim raises red flags.

An aggressive approach can backfire. If the IRS suspects that a company is making fraudulent or overly aggressive claims, it can reopen tax years well beyond the standard three-year statute of limitations—sometimes going back seven years or more. The consequences can be severe: expanded audits, penalties, reputational damage, and a strained relationship with the IRS that can affect future filings.

Moreover, relying on a firm’s size as a proxy for quality can lead to complacency. Businesses may stop asking critical questions or reviewing the details of their claims, assuming that the experts have it covered.

Mark emphasized, “Every company is ultimately responsible for what’s on its tax return, regardless of who prepared it.”
The prestige of a vendor should never replace due diligence. Trust must be earned through transparency, not assumed based on branding.

Trust must be earned through transparency, not assumed based on branding.

As Jamie Overberg, partner at TaxOps Minimization, pointed out, “Just because you can get away with something doesn’t mean you should.”

The Fallout: Real-World Consequences

Mark and Jamie share a couple real-world examples that illustrate the dangers of trusting aggressive R&D credit vendors—especially when decisions are driven by the promise of a bigger refund rather than sound tax strategy.

Japanese Automaker

In one case, a Japanese automotive manufacturer had a well-documented, IRS-approved methodology for calculating its R&D credit, including a pre-filing agreement that had passed multiple audits without issue.

However, a new VP of Tax was swayed by a Big Four firm’s pitch to double the credit—despite TaxOps already having accounted for every engineer and qualifying activity at the company.

The result?

A multi-year IRS audit that has become a “huge mess,” according to the automaker. Once confident in its compliance, the automaker is now entangled in a prolonged examination and has distanced itself from its former advisors out of embarrassment.

Food Services Company

In a separate case, a food services company initially declined to pursue the R&D credit due to the limited scope of qualifying activities in their operations. Years later, they engaged a Big Four firm that aggressively claimed a credit on their behalf.

When TaxOps recently reconnected with the company’s VP of Tax, the executive admitted—albeit with a knowing eye-roll—that the credit was likely overstated. His attitude suggested a belief that the Big Four’s reputation would shield them from IRS scrutiny.

But knowingly filing an inflated claim, even with a Big Four firm, doesn’t absolve a company of legal responsibility. The risk of audit and reputational damage remains very real for this VP of Tax and the food services company.

These stories underscore a critical lesson: just because a vendor can promise a bigger credit doesn’t mean it’s legitimate or safe for your business. The short-term gain of a larger refund can quickly be overshadowed by the long-term cost of an audit, penalties, and damaged credibility.

How to Protect Your Business

Mark and Jamie offer actionable advice for companies navigating the complex world of R&D tax credits. Their guidance is especially valuable for CFOs, tax directors, and business owners who may be relying on third-party vendors but still want to ensure their filings are defensible and compliant.

  • Educate yourself: Even if you outsource R&D credit work, tax managers and preparers should understand the basics of Section 41 and question anything that seems off.

Read more: Pay Less, Invest More

  • Ask the right questions: If a vendor promises a large credit, ask how they plan to get there. If the explanation sounds like a “slick used car salesman,” it probably is.

Read more: R&D Credits: Big Box Myths and Cutting Edge of “Quick and Easy”

  • Know your threshold: For small companies, having six full-time equivalent engineers typically justifies pursuing the credit. Anything less may not be worth the risk or cost.

Read more: A Guide for PE Firms: Hidden R&D Tax Credit Value in #6engineers

The R&D tax credit is a powerful incentive—but only when used responsibly. As the IRS adjusts their audit processes and enforcement capabilities, businesses must be vigilant about who they trust to prepare their claims. As Mark put it, “We can make up a whole bunch of stuff too—but that’s not what the law says, and that’s not legal.”

Eligible for R&D Credits?

Any company that develops new or improved products, processes, or software—in some cases, whether profitable or not—may qualify for these lucrative credits. Wondering if you are eligible to take advantage of lucrative research credits that could cut your federal and state tax liability? 

Find out here! Eligible for Lucrative R&D Credits?

Disclaimer: This content is for educational purposes only and is not intended, nor should it be relied upon, as legal, tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented. 

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