Disallowed Research Tax Credit Results in Accuracy-related Penalties

The U.S. Tax Court recently issued a memorandum opinion in the case of Betz v. Commissioner, T.C. Memo 2023-84. The ruling pertains to the eligibility of taxpayers for a research tax credit under IRC section 41. The court ruled against the taxpayers and disallowed the claimed credits, while also imposing accuracy-related penalties under section 6662(a), in addition to underpayment penalties, for the tax years 2014, 2015, and 2016.

Section 6662(a) imposes an accuracy-related penalties on any portion of an underpayment of tax required to be shown on a return if such underpayment is attributable to negligence or disregard of rules, or substantial underpayment of income tax.  Penalties may amount to 20% to 40% of underpaid taxes, depending on the circumstances.

It is essential to understand that not only were the claimed research tax credits disallowed, but the taxpayers were also subjected to accuracy-related penalties. This emphasizes the importance of diligently adhering to the necessary documentation and eligibility requirements when claiming tax credits.

We strongly urge you to carefully review your own research tax credit claims, ensuring that all essential criteria are met to avoid potential issues and penalties.

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