The IRS has now taken it upon itself to vigorously pursue taxpayers taking advantage of certain tax breaks that the IRS does not like, even though Congress consistently passes legislation supporting those breaks. This is particularly true with respect to the conservation easement charitable deduction (section 170(h) of the Internal Revenue Code) and the research and develop (R&D) tax credit (section 41 of the Code). While these two particular tax benefits appear to be unrelated, they are becoming more and more prominent in the tax controversy world because the IRS is targeting returns that take advantage of these tax benefits. We have seen a significant increase in audits of both of these benefits.
Earlier this year, Congress passed legislation that permanently extended enhanced deductions for conservation easements in the America Gives More Act (H.R. 644). And just last week, Congress proposed legislation to expand the availability of the R&D tax credit to contractors performing research and development work in the COMPETE Act (S. 537). These are just two recent pieces of legislation demonstrating Congress’s long-standing support for these tax benefits.
Despite Congress’s strong support for both the R&D tax credit (to encourage research) and the charitable deduction for conservation easement donations (to encourage preservation of important land), the IRS has taken a different view. The IRS now approaches almost any claim to either of those benefits as both overstated and inappropriate. In fact, the IRS does whatever it can to disallow these benefits, usually by attempting to demonstrate that the taxpayer has made a technical foot fault, rather than undertaking the more onerous process of trying to determine the accurate amount of the credit or deduction to be allowed.
When the IRS is at odds with Congress, it can put taxpayers (and tax practitioners) in a very uncomfortable position. These tax benefits are legitimate, and taxpayers can and should claim them when appropriate. However, claiming these benefits may increase the likelihood of audit and the related headache and pain of going through an audit. This can make taxpayers uneasy about how to report legitimate claims for credits and deductions. Because the IRS has taken a negative view of these benefits, it is more important than ever to maintain comprehensive records to support the claimed benefits and to ensure compliance with all technical requirements. If you have any questions about potential audit risk associated with these benefits, you can contact anyone on our team.