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Statistical Sampling: Adapting Your R&D Tax Credit Study Approach

By February 13, 2024No Comments
Statistical Sampling for R&D Tax Credit Study- DST Advisory Group

Statistical Sampling Success: Adapting Your R&D Tax Credit Study Approach for the New IRS Rules


For large companies with extensive research projects, the R&D Tax Credit offers substantial tax savings, fueling further innovation and strengthening global competitiveness. This financial incentive supports the continuous investment in new developments, securing a technological edge. The IRS recent re-emphasis on specific business component qualification in R&D tax credit studies, poses new challenges for large companies reliant on statistical sampling to manage their voluminous project data. Given the complexity and scale of their research activities, statistical sampling has been the only feasible method to sift through and analyze their extensive data. However, disputes over sample set definitions and sizes, alongside a growing preference for detailed, business component-based analysis as outlined on the new proposed F6765, complicate the use of this approach, highlighting a critical area of concern for these companies in demonstrating compliance and maximizing their tax credit potential.

The Role of Statistical Sampling in R&D Tax Credit Studies


  • Efficiency in Data Handling: 
      • Allows taxpayers with large volumes of data to manage and analyze their projects effectively, streamlining the identification of eligible R&D activities and expediting the tax credit claim process. 
      • This method significantly reduces the administrative burden, enabling a more focused allocation of resources towards innovation.
  • IRS Acceptance: 
      • Outlines how the IRS’s Audit Technique Guidelines support the use of statistical sampling, showcasing its legitimacy. 
      • This endorsement provides a framework for taxpayers to follow, ensuring their sampling methodology aligns with IRS expectations, thereby reducing the risk of disputes during audits.
  • Cost-effectiveness: 
    • Reduces the costs associated with a full-scale review of all data/projects, allowing for the allocation of saved resources to further R&D efforts. 
    • It also minimizes the need for extensive manpower and external consultancy fees, enhancing the overall return on investment for R&D tax credit claims.


  • Sample Set Disputes: 
      • An increase in disputes regarding the size and definition of sample sets (employee-based, activity-based, project-based, department-based). 
      • These disputes often lead to increased scrutiny from the IRS, potentially resulting in prolonged audits and the need for additional documentation, which can delay tax credit claims and affect cash flow.
  • Lack of Understanding: 
      • A gap in appreciation and understanding of how to determine an appropriate sample set. 
      • This lack of understanding not only complicates compliance efforts but also increases the likelihood of errors in tax credit calculations, risking potential errors and undermining the credibility of the entire R&D claim.
  • Challenges with Business Component Analysis: 
  • The move towards a business component-based analysis on the new proposed Form 6765 requires more detailed evidence of R&D efforts, making compliance more challenging for companies with numerous intricate projects. 
  • This necessitates a greater technical understanding to ensure that eligible R&D costs are accurately identified and documented, complicating the submission of defensible tax credit claims.

Best Practices for Organizing and Sorting Documentation

Expanding on the best practices for organizing and sorting documentation to enhance the efficiency of R&D tax credit studies:

  • Business Component Qualification: It’s crucial to accurately identify the level of business component qualification to ensure that all R&D activities are correctly classified and claimed. This involves:
    • Thorough Review of Projects: Conducting a detailed review of all projects to understand their objectives, resources utilized, and outcomes, ensuring that each project’s eligibility is assessed against the IRS’s criteria.
    • Segmentation of Activities: Breaking down projects into smaller components or activities to better identify which aspects qualify for R&D credits. This segmentation helps in isolating and documenting the experimental or research elements of each project.
    • Continuous Training: Providing ongoing training for project managers and technical staff to recognize and document activities that may qualify for R&D tax credits, ensuring that qualifying activities are not overlooked.
  • Documentation Strategy: Developing a robust strategy for organizing documentation is essential for supporting R&D tax credit claims and facilitating efficient audits. Best practices include:
    • Centralized Documentation System: Implementing a centralized system for storing all R&D documentation, including project plans, experiments, results, and expenditures. This system should be easily accessible and searchable to quickly locate relevant documents during an IRS audit.
    • Consistent Documentation Process: Establishing a standardized process for documenting R&D activities, ensuring that all necessary information is captured contemporaneously. This process should include guidelines for what information to document, how to document it, and where to store it.
    • Leveraging Technology: Utilizing project management and documentation software to track R&D activities in real-time. This technology can help in organizing data, generating reports, and providing a contemporaneous trail of R&D efforts and associated expenditures.

These best practices not only aid in the efficient organization and sorting of documentation but also significantly enhance the defensibility of R&D tax credit claims, reducing the likelihood of disputes and facilitating a smoother audit process.

Addressing the Challenges: DST’s Approach

DST’s methodology for R&D tax credit claims combines engineering expertise with strategic documentation to optimize compliance and benefits. Here’s a condensed overview:

  1. Tax Engineers Utilization: DST employs Tax Engineers to conduct in-depth interviews and technical assessments, ensuring projects meet R&D tax credit criteria. This team’s technical and legal expertise is crucial for identifying qualifying activities accurately.
  2. Nexus Between QRAs and QREs: A clear, defensible link is established between Qualified Research Activities and Expenses, with detailed mapping of expenses to specific research activities, bolstering claim credibility.
  3. Comprehensive Documentation: DST’s strategy involves creating detailed narratives and maintaining contemporaneous records (logs, emails, reports) to substantiate research efforts, making each claim robust and well-supported.
  4. Identifying Exclusions: DST meticulously identifies non-qualifying activities to ensure claims are precise and compliant, demonstrating due diligence in claiming only legitimate expenses.
  5. Project Lists and Tracking Systems: The use of project tracking tools helps organize R&D efforts and expenses, providing structured evidence for tax credit claims and streamlining the documentation process.

This streamlined approach ensures DST’s clients not only recover the maximum R&D tax credits but also maintain stringent compliance with IRS regulations, reducing audit risks and enhancing claim defensibility.

The Future of Statistical Sampling in Light of Proposed Form Changes

  • Overview of Proposed Changes: 

The proposed changes to Form 6765 for the tax year 2024 entail a significant increase in the detail and amount of information required from taxpayers. These changes pivot towards a more qualitative assessment of R&D activities, demanding extensive data on the qualification of research activities and the specifics of each business component contributing to the credit. For taxpayers using statistical sampling, this shift complicates the submission process, as it challenges the efficiency and practicality that statistical sampling offers by requiring a comprehensive listing of all business components and related research activities.

  • Challenges for Taxpayers:

The new requirement to “provide all items in the population” and “list all business components,” as clarified during an IRS consultation session, marks a substantial hurdle for those employing statistical sampling methods. This mandate directly impacts the method’s foundational principle—analyzing a representative subset to infer about the entire population. The detailed reporting on business components, including their descriptive names, the research undertaken, and the expenditures involved, poses a logistical and administrative challenge, potentially diminishing the benefits of statistical sampling.

Solutions and Recommendations

  • Adapting to Form Changes:

Taxpayers can navigate these new complexities by enhancing their documentation and analysis processes. This involves revisiting and possibly revising statistical sampling methodologies to ensure they can capture and report the detailed information required by the new form sections. Implementing more sophisticated data management and documentation systems may also aid in tracking and reporting the necessary details for each business component, even when using sampling techniques.

  • DST’s Proactive Approach:

DST addresses these challenges by leveraging the expertise of Tax Engineers, who specialize in identifying, documenting, and substantiating qualified R&D activities and expenditures. DST’s approach involves a thorough analysis of R&D activities, ensuring that even within a statistical sampling framework, the documentation is comprehensive and meets the IRS’s new reporting standards. By emphasizing detailed documentation and strategic analysis, DST can help taxpayers meet the new requirements effectively, ensuring that their R&D tax credit claims are robust, defensible, and in compliance with the updated IRS mandates.


The landscape of R&D tax credit documentation is undergoing significant transformation with the proposed changes to Form 6765 for tax year 2024. These adjustments underscore a heightened focus on qualitative assessments and detailed reporting of all business components, presenting unique challenges, especially for large taxpayers with extensive data sets traditionally managed through statistical sampling. While statistical sampling has offered efficiency and cost-effectiveness, the new requirements demand a reevaluation of this methodology to ensure compliance and maximize returns on investment (ROI).

The introduction of detailed sections and the requirement to list all business components, even within sampled populations, necessitates a nuanced approach to tax credit studies. Taxpayers must balance the pros of statistical sampling, such as reduced administrative burdens and IRS acceptance, against the cons, including potential disputes over sample sets and the challenges of aligning with business component-based analysis under the new form guidelines. The future of R&D tax credit claims for large organizations hinges on adapting strategies that not only comply with IRS requirements but also optimize the benefits derived from their R&D investments.

Next Steps for Executives

Large taxpayers are urged to critically assess their current methodologies in light of the proposed form changes. It is an opportune moment to explore new strategies that align with the evolving IRS guidelines while still leveraging the advantages of statistical sampling where feasible. DST’s engineering-driven approach offers a model for achieving compliance and enhancing ROI by combining the precision of tax engineering expertise with the efficiency of advanced documentation practices. We encourage tax executives to engage with experts like those at DST, who can provide guidance and support in navigating these changes, ensuring that your R&D tax credit studies are both compliant and optimized for the greatest possible benefit.