A 10 step SR&ED Audit Survival Guide
If you file SR&ED claims, you know all too well that audits are now a common occurrence. In my early days as a SR&ED practitioner, defending claims chewed up a mere 15% of my billable time. In recent years that number has shot up to 40%.
Filing a claim that is defendable and will survive an audit has become a significant part of my job. Based on my experience, here are ten tips that will help you navigate a potential SR&ED audit.
Respond ASAP: Immediately acknowledge the Request for Information (RFI) letter by calling CRA. Estimate the timeline involved and the associated deliverables. Let CRA know if their standard 30-day response time interferes with a major release or busy period. They can usually extend the deadline for an additional 2 weeks.
Understand the Scope: Examine the RFI letter carefully to determine if the audit is a financial review, a technical review, or both? Does the letter hint at specific issues? If multiple SR&ED projects are filed, the review will usually be limited to just some of the projects. While most letters are “form letters” (particularly on the financial side) some letters from technical auditors are often specific to their domain. Note that most auditors do not know the reason you were selected — they were assigned your case by their manager via automated CRA screening.
Assign a Project Manager: Treat the SR&ED audit as you would any other company project. Map out the deliverables, scope, timeline, and budget. Assign the task to a Project Manager – that person will lead the project and manage any additional contributors. As with other projects, your internal bandwidth and resources will depend on the business case of the claim and the dollars at stake. You may consider hiring an external consultant. Either way, I’ve seen the best results come from clients who assigned someone to support the audit as a “project”.
Present Your Case Logically & Concisely: Your response should address each requested item directly. Since the review can be quite voluminous, it’s best to organize all responses accordingly, using indexed binders or an organized file/folder system referencing each question specifically. Considering that your auditor may be reviewing 20 different cases at any one time, it’s in your best interest to make the process easy for them – essentially helping them help you. Presenting the initial RFI package correctly also helps CRA hone in on potential issues for further (on-site) investigation.
Quantity and Quality: When presenting your technical materials do not expect that providing technical specs, a white paper or a design document will suffice. Nor should you expect that overloading CRA with technical documentation is going to win them over. SR&ED is about the HOW, not the WHAT. The key is to focus on specific pieces of evidence that highlight technological uncertainty and experimental work performed — NOT specs of the final product, marketing or sales collateral. You need to show this “smoking gun”, emphasizing your strongest pieces of evidence. It’s good practice to correlate all data directly to the specific technological uncertainties and work performed that were originally presented in your claim.
Prepare: The next step is usually an on-site review by CRA where you meet the reviewers and discuss the merits of the project. It’s important that any individual directly involved in the project is present. Do you know what SR&ED really is? Do you believe the work is SR&ED eligible? Everyone involved should understand what SR&ED work is or isn’t. Have all your documentation and evidence organized so you can demonstrate and communicate the SR&ED work efficiently.
Find Your Star Witnesses: The review is primarily about communication, so you need to decide which one of your team members can communicate your position most effectively. If your CTO is more of a high-level, business minded individual, you may want to rely on the project’s R&D lead instead. In my experience, the CEO is usually not the best person in reviews. Find the hands-on “doers” who can communicate your SR&ED position with the best technical fluency.
Know thy Customer: This classic commandment also holds true for CRA audits. Like all your important meetings, understanding your audience is key. Are they younger or older? What is their background? Do some research and tailor your presentation accordingly. For example, if I know a certain auditor is visually inclined, I will be prepared to whiteboard things out. If an auditor possesses a specific scientific background, I will use relevant analogies that help them understand the case in the most familiar terms. A quick pre-meeting call to CRA may reveal areas they want highlighted during the meeting. In general, treat CRA like you would your banker — keep it professional and productive.
Question Assumptions: If your auditor starts the meeting with certain assumptions such as “this is routine engineering”, ask them why they feel this is the case. Do they have examples to back up their beliefs? Make sure all your talking points and documentation are accessible. Never assume the positive audit experience you had a few years ago will be replicated. Do not even assume your auditor has read your claim. Each claim needs to stand on its own, with each auditor having their own way of interpreting and applying SR&ED policy.
Learn: Audits present the best opportunity to learn about eligible work, refine your SR&ED process and improve your documentation. Do not assume you are now “safe” in the near term, as CRA can audit you as many times as they want. If you were given formal written guidance to improve your documentation, you must comply in the future or risk denial of your claim.
For further reading, I would suggest CRA’s own Claim Review Manual. It outlines the process CRA should follow in taxpayer reviews. I hope these tips have provided you with helpful strategies on how to survive a SR&ED audit.