Case Study

DST's Approach Helps Save a Tier 1 Auto Supplier $4.5M Through an IRS Examination

Client Background: 

A Tier One Automotive supplier with $300M annual revenue and three manufacturing facilities across the US was in the process of designing a new, state-of-the-art manufacturing line in one of their newest facilities. This location also housed a 10-person engineering team. Each facility has their own engineering teams (product, process, quality, and manufacturing), totalling approximately 30 employees. The company had never claimed the RTC before because their foreign Headquarters were not fully aware of what qualifies. They also received incomplete advice from foreign tax providers.

Client Benefit:

DST was engaged to conduct a full study for an originally filed claim, as well as amending prior years.  In total, DST was able to help the company claim over $4.5M in credits over 4 years.  The claims were approved by the company’s auditors.  DST has been assisting the taxpayer to claim over $1M in credits annually.  The IRS audited the federal claim for 3 years, and the taxpayer retained 94% of the federal credits.

DST Methodology:

There are parallels between the U.S. Research and Experimentation (R&E) Tax Credit Program and programs administered by other countries.  These programs are designed to encourage taxpayers to conduct research efforts to maintain a competitive advantage in the marketplace.  They involve advancing technologies or technical ‘know-how’ and require the work to be done in the fields of science or engineering. 

Despite some fundamental similarities, the U.S. program is different in eligibility requirements and qualifying costs.  In general, the U.S. program includes a broad definition of qualified research activities, and more recently has had several regulatory changes that allow for a broader range of qualified expenses to be captured.  

DST assisted the client in developing a solid framework and methodology for the credit.  Our Engineering professionals have a deep understanding of the automotive and Tier One industries. This allows for an efficient interaction with the individual facilities, and helps us maximize the credit and better substantiate the claim.  

One of the main parts of the IRS examination focused on consistency issues for the base period.  The base period years were 7 years ago, and one of the entities underwent a change in ownership during one of the base years.  DST worked with the client pre-emptively to gather base period contemporaneous documentation and generate a strong and clear memorandum to memorialize the base period years.  The IRS reviewed these and determined that everything was in order and that consistency was met. 

The second issue raised by the IRS examination was the nature of the tooling and the taxpayers’ technical uncertainty related to its qualification as qualified research activities (QRAs) and subsequent expenses (QREs).  Again, DST pre-emptively worked with the taxpayers’ engineers and other subject matter experts (SMEs) to collect contemporaneous documentation.  Additional copies of select invoices were provided to the IRS, and upon review of the information, the IRS determined that everything was in order and that no adjustment was needed for the tooling. 

The third issue raised by the IRS examination team was the nature of the qualified support time for employees. They requested a time survey be completed by over 60 employees with selected operational job titles. DST worked with the taxpayers’ HR team to provide guidance, administer, and collect the questionnaires back from the employees. The IRS reviewed and adjusted a few job titles percentages down slightly. These were shop-floor operational employees, whose total QRE Wage amounts had minimal impact to the credit. 

Overall, this IRS examination took almost 3 years to close out and included several changes within IRS exam personnel.  It is our opinion that the minor adjustment in qualified wage QREs were minimal and it was likely necessary for the IRS exam team to identify some reduction after such a long period. The taxpayer was extremely pleased with the outcome of the slight reduction, and was thrilled to have their refunds processed, and subsequent claim years justified.

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