Audit Finding
OpenWrong tax treatment
Generic AI
Federal -- Wrong tax treatment
The Claim
An AI documentation tool used by an engineering firm described the firm's projects as 'new products' in R&D tax credit narratives when the projects were actually process improvements.The Error
Under IRC §41 and Treas. Reg. §1.41-4, qualified research must meet the four-part test, including a 'permitted purpose' requiring development or improvement of a business component's functionality, performance, reliability, or quality. Mislabeling process improvements as 'new products' misrepresents the nature of the qualifying activity, producing narratives that do not accurately reflect what was done and that fail to align with the IRS's required technical definitions and contemporaneous documentation standards.
The Citation
IRC §41(d); Treas. Reg. §1.41-4(a) (four-part test, permitted purpose, and process of experimentation requirements)
Business Impact
A small engineering firm relying on AI-generated narratives that misclassify process improvements as new products faces serious R&D credit audit exposure, potential full disallowance of claimed credits, and costly return amendments or IRS examination defense.
Verdict
KKATC Tax Response
Note
Sourced from news candidate: https://massietaxcredits.com/resources/articles/ai-rd-tax-credit-risks/KKATC Tax Prep and Consulting
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