Author:
R&D Tax Advisors
Role:
CPAs
Publish Date:
Nov 24, 2025
The Question
“If our engineering team did the work, how could the IRS possibly deny the credit?”
It’s one of the most frustrating outcomes a company can face.
You invested in real R&D. Your team solved real technical problems. You built features, redesigned systems, shipped code — the work was real.
But the IRS doesn’t award credits based on effort.
It awards them based on evidence.
And without strong, contemporaneous documentation that clearly ties technical work to the tax rules, even a legitimate $100,000 credit can collapse into a $0 benefit.
The Short Answer
Poor documentation can erase even the strongest R&D work.
The biggest failures show up in three areas:
No contemporaneous records
Payroll allocations disconnected from actual projects
Technical work described in vague, non-technical terms
When those weaknesses appear, the IRS doesn’t haircut the credit — it often zeros it out entirely.
The Deep Dive
1. What “Poor Documentation” Actually Means
Documentation doesn’t mean binders or bureaucracy.
It means proof of technical uncertainty and experimentation — captured as the work happened.
The IRS wants to see:
What uncertainty you faced
What alternatives you evaluated
What tests or iterations you ran
How the work was technological in nature
Which engineers performed which tasks
Poor documentation usually looks like:
Tickets labeled “Bug fix” or “Refactor”
Epics without acceptance criteria
Git commits with no meaningful context
Sprint notes that say nothing about experimentation
Time estimates created months later from memory
When that’s all you have, your legitimate R&D becomes indistinguishable from routine work.
2. The Before-and-After Example
Let’s walk through a realistic example.
The Work
A company builds a new machine-learning scoring engine:
Faced performance uncertainty
Tested multiple modeling approaches
Evaluated three algorithms
Reworked infrastructure to support inference
Ran A/B tests and tuning cycles
Involved several engineers over several months
Potential Credit: $100,000
Here’s how documentation quality changes everything.
Scenario 1: Strong Support → $100K Benefit Sustained
The company maintained:
Architecture diagrams showing uncertainty
Jira tickets tracking hypotheses, tests, and outcomes
Git commits with descriptive messages
Sprint notes logging redesigns and failures
Payroll allocations tied directly to project work
Clear documentation aligned to the IRS four-part test
IRS result:
The credit is sustained. The $100K benefit stays in place.
Scenario 2: Weak Support → Benefit Reduced to $0
Same work.
Different documentation.
In this version:
Jira tickets say “Optimize model” or “Misc updates”
No tracking of failed approaches
Git commits with single-word messages
No written evidence of experimentation
Uniform payroll allocations with no project link
No tie to technical uncertainty
IRS result:
The benefit is disallowed in full.
Why?
Because the IRS has no proof:
What uncertainty existed
What experiments occurred
What alternative approaches were considered
Why the work was technological
Who performed qualifying tasks
The work was real — the evidence wasn’t.
3. Why the IRS Takes a Hard Stance
The government isn’t trying to be unreasonable.
The R&D credit is meant to reward technical problem-solving, not general development.
Without documentation:
Routine work looks like R&D
Payroll allocations appear inflated
Narrative support collapses
Estimates look arbitrary
When doubt exists, auditors default to zero — because the burden of proof is on the taxpayer.
4. Where Companies Go Wrong (and Why It’s Preventable)
Most companies lose credits not because the work wasn’t R&D, but because the records weren’t maintained in real time.
Common pitfalls:
Reconstructing everything at year-end
Assuming Jira or Git is “automatically enough”
Using department-level percentages
Not connecting engineering and finance
Describing technical work in business language
The good news:
Most engineering teams already generate what the IRS wants — they just don’t centralize it or narrate it clearly.
5. How to Build Audit-Ready Documentation Without Extra Burden
The best documentation systems fit naturally into engineering workflows.
Light-touch, high-impact habits include:
Adding uncertainty and hypothesis detail to tickets
Writing meaningful Git messages (“why,” not just “what”)
Saving architecture diagrams and test results
Tagging project work so payroll ties cleanly
Logging failed approaches, not just the final one
Reviewing project documentation quarterly
This isn’t paperwork.
It’s simply preserving the truth of the work.
6. The Real Hidden Cost of Poor Documentation
When documentation fails, the credit isn’t the only loss.
Companies also face:
Amended filings
Additional professional costs
Delayed planning decisions
Audit defense expenses
Time spent rebuilding the story
External skepticism during due diligence
A $100K lost credit often becomes a $150K–$200K strategic setback.
The Takeaway
The R&D credit doesn’t reward effort — it rewards documented technical experimentation.
Poor documentation can turn a legitimate $100,000 credit into:
a disallowed claim,
a protracted audit,
and a $0 benefit.
Good documentation isn’t about doing more work.
It’s about capturing what already happened — clearly, contemporaneously, and in a way the IRS can follow.
Because the fastest way to lose an R&D credit is simple:
Let the technical story disappear.
