“We absolutely did R&D. How could the credit get denied?”

This reaction is common — and understandable.

In many denied or reduced R&D credit cases, the issue isn’t that the work didn’t happen. It’s that the work wasn’t supported in a way the IRS can accept.

The R&D credit is not a reward for effort.
It’s a tax claim that must be proven.

That distinction explains most denials.

The Short Answer

R&D credits are rarely denied because companies lied about what they did.

They’re denied because:

• documentation didn’t line up with the rules,

• methodology wasn’t defensible,

• or the story of the work couldn’t be reconstructed credibly.

Below are the five most common reasons this happens — even when the underlying work was legitimate.

1. The Work Was Described Too Broadly

Many companies document R&D at a high level:

• “We built new features”

• “We improved performance”

• “We worked on scalability”

That language may be true — but it’s not sufficient.

The IRS evaluates R&D at the business-component level, not the company or roadmap level. When activities aren’t clearly tied to specific products, systems, or components, the work can appear vague or routine.

Real R&D that isn’t clearly scoped often looks indistinguishable from normal development.

2. The Four-Part Test Was Assumed — Not Demonstrated

A common mistake is assuming that if work feels technical, it must meet the four-part test.

In reality, the IRS expects evidence that the work:

• was technological in nature,

• involved a real uncertainty,

• required experimentation,

• and was intended to improve a business component.

When documentation jumps straight to outcomes — without showing what was uncertain or how alternatives were evaluated — the credit becomes fragile.

This is one of the most frequent reasons adjustments occur.

3. Time Estimates Weren’t Grounded in Evidence

Time allocation is often where good credits break down.

Estimates based on:

• titles,

• generalized percentages,

• or memory months later

are easy to challenge.

The issue isn’t estimation itself — the IRS understands estimates are necessary. The issue is whether those estimates are anchored to real project activity.

When wage allocations can’t be traced back to specific work, components, or periods of experimentation, credits are often reduced — even if the work clearly occurred.

4. Documentation Was Created Too Late

Another recurring problem is timing.

Documentation assembled:

• after an audit notice,

• long after the tax year closed,

• or without contemporaneous artifacts

is treated skeptically.

Recent court decisions have reinforced that substantiation must be contemporaneous, not reconstructed purely for tax purposes.

That doesn’t mean companies need new systems — but it does mean relying entirely on after-the-fact surveys or narratives is increasingly risky.

5. Methodology Didn’t Hold Up Under Scrutiny

Two companies can perform similar work and get very different outcomes because of methodology.

Credits get denied or reduced when:

• assumptions aren’t explained,

• methods change year over year without rationale,

• or calculations can’t be replicated.

Even when the underlying work qualifies, inconsistent or opaque methodology raises red flags — especially during review by the Internal Revenue Service.

Defensibility is as much about how the credit was calculated as what was done.

Why This Feels So Unfair

From a company’s perspective, denial feels personal:

• engineers worked hard,

• uncertainty was real,

• problems were solved.

But the IRS isn’t evaluating effort. It’s evaluating evidence.

That mismatch — between lived experience and formal proof — explains why so many legitimate credits struggle.

The Real Lesson

R&D credits are not denied because innovation didn’t happen.

They’re denied because:

• the connection between work and rules wasn’t visible,

• the narrative wasn’t specific enough,

• or the support didn’t meet the standard required for a tax claim.

This is why strong credits aren’t built at filing time — they’re built during the year, as work happens.

The Takeaway

If there’s one takeaway, it’s this:

It’s not enough to do R&D. You have to be able to show it.

Companies that understand this early:

• set better expectations,

• build stronger documentation habits,

• and experience fewer surprises later.

Those that don’t often learn the difference the hard way — after the work is already done.