Who pays for an overclaim (brief) | Research Credit Integrity Alliance

Key points

When a federal research credit is reduced, the taxpayer repays the credit or refund with interest at the underpayment rate.12
The taxpayer may also owe a penalty of 20 percent of the underpayment or of the excessive amount of a refund claim, unless it shows reasonable cause.34
A preparer is penalized only where its position lacked substantial authority and it knew or should have known, or for willful or reckless conduct; the penalty is measured partly by its income from the claim.5
Reasonable reliance on advice can remove a penalty, but not the tax or the interest.67
The United Kingdom, Canada and Ireland also leave repayment with the claimant.8910

What the taxpayer pays

A credit that the IRS disallows must be returned. Tax that should have been paid carries interest from the date it was due, and an erroneous refund can be recovered by suit with interest from the date of the refund.12 The underpayment rate is the federal short-term rate plus 3 percentage points, or plus 5 points for large corporate underpayments.11

Two penalties can apply, and the statute coordinates them. The accuracy-related penalty is 20 percent of the portion of an underpayment due to negligence or a substantial understatement.3 The erroneous claim penalty is 20 percent of the excessive amount of a claim for refund or credit, imposed on the person making the claim, unless the excess is due to reasonable cause.4

The research credit depends on judgments about each business component, including whether 80 percent or more of the activities were experimentation.12 A claim can be reduced without anyone acting in bad faith.

Reliance on advice

No accuracy-related penalty applies where the taxpayer shows reasonable cause and good faith.6 The regulations say reliance on a professional advisor "does not necessarily demonstrate reasonable cause and good faith"; it does so only if it was reasonable and in good faith, the advice took account of all pertinent facts, and the taxpayer disclosed what it knew to be relevant.7 Even then, the defense removes the penalty, not the tax or the interest.

What the preparer pays

A tax return preparer owes the greater of $1,000 or 50 percent of the income derived from a return or claim where an understatement is due to a position lacking substantial authority that the preparer knew or should have known of, and the greater of $5,000 or 75 percent for willful or reckless conduct.5 The penalty is abated if there was in the end no understatement.5 Other sanctions, such as the aiding and abetting penalty and Circular 230 discipline, also turn on knowledge or misconduct.1314

No federal rule requires an adviser to refund a fee when a claim is reduced. A promise to refund the fee if a position is challenged or not sustained is itself a contingent fee under Treasury's definition.15

As an illustration only: on a refund claim of $500,000 prepared for 20 percent, the fee is $100,000. If $200,000 is disallowed, the taxpayer repays $200,000 with interest and may owe a $40,000 penalty. The $40,000 of the fee that related to the disallowed amount stays with the adviser unless the contract says otherwise. The adviser owes a penalty only if its position fell below the statutory standard.

Abroad

HMRC says a customer that uses a tax agent remains responsible for its own tax affairs, and gives an example in which an agent took £1,600 of £4,000 of relief and the business later repaid the £4,000 plus interest.8 From April 2024 agents could no longer receive clients' R&D tax credit payments through nominations, which HMRC said would reduce "the financial incentive for agents to overstate claims".8 Canada places legal responsibility on the SR&ED claimant and requires disclosure of each preparer's billing arrangement.916 Ireland charges an unauthorized claim at four times the amount and states that a taxpayer "cannot devolve" responsibility to an agent.1017 Each country also has adviser penalties that depend on knowledge or intent.

The case for the present allocation

The taxpayer receives the credit and signs the claim, so it should return what it was not entitled to. Preparers already face penalties measured by their income from the claim. Contracts can provide audit support or fee holdbacks, and reasonable reliance can remove penalties. Penalizing advisers without fault could discourage legitimate claims. These arguments are serious. Nothing in this brief suggests that advisers who charge contingent fees act improperly.

The answer is about the incentive. A reasonable but unsuccessful position costs the taxpayer the tax, interest and the cost of the examination, but carries no preparer penalty. Under a contingent fee, the reward for a larger claim goes to the adviser while most of the cost of the part that does not survive stays with the taxpayer.

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. 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

Office of the Law Revision Counsel, 26 U.S.C. 6601, 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
Office of the Law Revision Counsel, 26 U.S.C. 7405 and 26 U.S.C. 6602, 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-chap76-subchapA-sec7405.htm and https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleF-chap67-subchapA-sec6602.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6662, subsections (a), (b)(1) and (2) and (d)(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-subtitleF-chap68-subchapA-partII-sec6662.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6676, subsections (a), (b) and (d), 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. 6694, subsections (a), (b) and (d), 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-sec6694.htm (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6664, subsection (c)(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-subtitleF-chap68-subchapA-partII-sec6664.htm (accessed 11 October 2026). Back
Treasury Department, 26 CFR 1.6664-4, paragraphs (b)(1) and (c)(1). https://www.ecfr.gov/current/title-26/section-1.6664-4 (accessed 11 October 2026). Back
HM Revenue and Customs, Approach to Research and Development tax reliefs 2023 to 2024 (published 30 October 2024), sections 2.1, 2.2 and 2.5. 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
Canada Revenue Agency, The SR&ED Review Process: A Guide for Claimants, Appendix A. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/technical-review-a-guide-claimants.html (accessed 11 October 2026). Back
Revenue Commissioners, Notes for Guidance, Taxes Consolidation Act 1997, Finance Act 2025 edition, Part 29, section 766C(10). https://www.revenue.ie/en/tax-professionals/documents/notes-for-guidance/tca/part29.pdf (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6621, subsections (a)(2) and (c), 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-subchapC-sec6621.htm (accessed 11 October 2026). Back
Treasury Department, 26 CFR 1.41-4, paragraph (a)(6). https://www.ecfr.gov/current/title-26/section-1.41-4 (accessed 11 October 2026). Back
Office of the Law Revision Counsel, 26 U.S.C. 6701, subsections (a) and (b), 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-sec6701.htm (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.50, Sanctions, paragraphs (a) and (c). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-C/section-10.50 (accessed 11 October 2026). Back
Treasury Department, Circular No. 230, 31 CFR 10.27, Fees, paragraph (c)(1). https://www.ecfr.gov/current/title-31/subtitle-A/part-10/subpart-B/section-10.27 (accessed 11 October 2026). Back
Canada Revenue Agency, Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, T661 E (26), Part 9. https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t661/t661-26e.pdf (accessed 11 October 2026). Back
Revenue Commissioners, Code of Practice for Revenue Compliance Interventions (effective 1 May 2022), section 4.6.2. https://www.revenue.ie/en/tax-professionals/documents/code-of-practice-revenue-compliance-interventions.pdf (accessed 11 October 2026). Back