Refundable credits and cash payouts (brief) | Research Credit Integrity Alliance

Key points

The federal research credit is generally used against income tax. Its main cash routes are the payroll tax election for qualified small businesses and refund claims on amended returns.12
HMRC estimated error and fraud at 25.8 percent in the UK SME scheme for 2021 to 2022, against 4.6 percent in RDEC, and restricted payments of credits to agents to reduce "the financial incentive for agents to overstate claims".3
For the employee retention credit, a different refundable federal credit, the IRS accepted 80 percent repayment because percentage fees had already been taken from many payouts.4
No official source measures how cash credit claims are prepared or paid for.

How the federal credit becomes cash

The research credit under Section 41 is a credit against income tax, and unused credits are generally carried back one year and forward twenty.56 A qualified small business, broadly one with gross receipts under $5,000,000 and no receipts before the last five years, may instead elect to use up to $500,000 a year against employer payroll taxes. The IRS says the election "is designed to benefit an eligible startup that has little or no income tax liability".51 A company that has paid tax in earlier years can claim the credit on an amended return and receive a refund; the IRS aims to decide such claims within six months.2

TIGTA reported in April 2026 that the IRS "still does not have processes to address ineligible taxpayers" claiming the payroll credit, while stating that most claimants are eligible. Its review did not cover how claims were prepared or paid for.7

What other countries record

United Kingdom. Measured error and fraud was far higher in the SME scheme, which included a payable credit, than in RDEC.3 The National Audit Office records that the 2023 cut in the SME payable credit rate from 14.5 to 10 percent was "in part, a response" to that difference.8 HMRC notes that "Some agents deduct their fees before paying clients the balance", and that a company repaying an overclaim must repay the full amount, "not the net amount you received".9
Canada. A 2012 federal consultation said small and medium-sized firms, whose enhanced credits were then generally fully refundable, "sometimes rely on third-party tax preparers charging on a contingency-fee basis", and that such fees may represent "30 per cent or more" of the benefit.10

Why cash matters

The following is analysis of the official statements above. Where a credit is paid in cash, a percentage fee can be paid from the cash, sometimes before the company receives the balance.94 The fee is settled before any review. If the credit is later reduced, the company repays the full amount. In the United States an excessive refund claim carries a 20 percent penalty on the person making it unless there is reasonable cause, and interest runs from the date tax was due.1112 The companies that use cash routes are start-ups and smaller firms with the least capacity to test a claim. HMRC found that 38 percent of the value of first-time claims was non-compliant, against 22 percent for repeat claimants.13

Circular 230 already bars practitioners from charging contingent fees for preparing refund claims, and bars them from negotiating a client's government refund check.14 Treasury has proposed extending the fee rule because a practitioner with a financial interest in a client's tax benefits "may be incentivized to increase such tax benefits". That proposal is not final.15

The case for success fees

A percentage fee costs a cash-poor company nothing up front, can be paid from the credit when it arrives, leaves the adviser bearing the cost of finding nothing, and can open specialist help to small firms. These are real advantages. Nothing in this brief suggests that advisers who charge such fees act improperly.

The answer is that a cash credit arrives soon after filing, so a fixed or capped fee can be paid from it on the same timetable. A percentage fee shares the risk of finding no credit, but the risk of a credit being reduced after it is spent stays with the company.114

Our position

Congress should prohibit contingent fees, commonly called success fees, in federal research and development tax credit engagements under Section 41, so that advisers are paid for the work they perform rather than for the size of the claim they produce. That includes claims that reach a company as a payroll tax reduction or a refund. Swanson Reed, which publishes this brief, is a fixed-fee R&D tax adviser with a direct commercial interest: it does not charge success fees, and a ban would remove a pricing model it competes against.

References

Internal Revenue Service, Qualified small business payroll tax credit for increasing research activities (page last reviewed or updated 28 June 2026). https://www.irs.gov/businesses/small-businesses-self-employed/qualified-small-business-payroll-tax-credit-for-increasing-research-activities (accessed 11 October 2026). Back
Internal Revenue Service, Research credit claims (Section 41) on amended returns frequently asked questions, introduction and question 5 (page last reviewed or updated 1 October 2026). https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions (accessed 11 October 2026). Back
HM Revenue and Customs, Approach to Research and Development tax reliefs 2023 to 2024 (published 30 October 2024), sections 1.2 and 2.1. https://www.gov.uk/government/publications/hmrcs-approach-to-research-and-development-tax-reliefs-2023-to-2024/approach-to-research-and-development-tax-reliefs-2023-to-2024 (accessed 11 October 2026). Back
Internal Revenue Service, IRS new Voluntary Disclosure Program lets employers who received questionable Employee Retention Credits pay them back at discounted rate, News release IR-2023-247, 21 December 2023. https://www.irs.gov/newsroom/irs-new-voluntary-disclosure-program-lets-employers-who-received-questionable-employee-retention-credits-pay-them-back-at-discounted-rate-interested-taxpayers-must-apply-by-march-22 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 41, Credit for increasing research activities, subsections (a) and (h), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapA-partIV-subpartD-sec41.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 39, Carryback and carryforward of unused credits, subsection (a)(1), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapA-partIV-subpartD-sec39.htm (accessed 11 October 2026). Back
Treasury Inspector General for Tax Administration, Controls for the Qualified Small Business Payroll Tax Credit Were Updated, but Ineligible Taxpayers Continue to Receive the Credit, Report Number 2026-408-012 (15 April 2026), Highlights. https://www.tigta.gov/sites/default/files/reports/2026-04/2026408012fr.pdf (accessed 11 October 2026). Back
National Audit Office, Report by the Comptroller and Auditor General: HM Revenue & Customs 2023-24 Accounts, paragraph 2.19. https://assets.publishing.service.gov.uk/media/6889f286048fff613a4d5b72/Report_by_the_Comptroller_and_Auditor_General.pdf (accessed 11 October 2026). Back
HM Revenue and Customs, Tell HMRC if you've claimed too much Research and Development (R&D) tax relief (last updated 14 August 2026), section "Make your disclosure". https://www.gov.uk/guidance/tell-hmrc-if-youve-claimed-too-much-research-and-development-rd-tax-relief (accessed 11 October 2026). Back
Department of Finance Canada, Consultation Regarding the Impact of Contingency Fees on the Effectiveness of the SR&ED Tax Incentive Program (2012), sections "Overview", "Background" and "Rationale for Contingency Fees", archived copy of 7 May 2013. https://web.archive.org/web/20130507033404/http://www.fin.gc.ca/activty/consult/sred-rsde-eng.asp (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6676, Erroneous claim for refund or credit, subsection (a), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap68-subchapB-partI-sec6676.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6601, Interest on underpayment, nonpayment, or extensions of time for payment, of tax, subsection (a), United States Code 2024 edition published by the Government Publishing Office. https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap67-subchapA-sec6601.htm (accessed 11 October 2026). Back
HM Revenue and Customs, HMRC's approach to Research and Development tax reliefs (published 17 July 2023), section 3.2, Theme 4. https://www.gov.uk/government/publications/compliance-approach-to-research-and-development-tax-reliefs/hmrcs-approach-to-research-and-development-tax-reliefs (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraphs (b) and (c), and 31 CFR 10.31, Negotiation of taxpayer checks, paragraph (a). https://www.ecfr.gov/current/title-31/subtitle-A/part-10 (accessed 11 October 2026). Back
Treasury Department and Internal Revenue Service, Regulations Governing Practice Before the Internal Revenue Service, notice of proposed rulemaking, REG-116610-20, 89 FR 104915 (26 December 2024), Explanation of Provisions part B. https://www.federalregister.gov/documents/2024/12/26/2024-29371/regulations-governing-practice-before-the-internal-revenue-service (accessed 11 October 2026; a Federal Register docket search on that date showed only the proposed rule). Back