Inside the IRS R&D Credit Wars: Lessons From the Audit Room
For tax professionals who claim the research and development credit, an audit is rarely a clean transaction. It can become a war of attrition. Engineers rotate off cases. Opening positions start at zero. Interviews stretch for hours. And the company that did the actual innovating often has to prove, line by line, that its work was real. In Episode 4 of the TaxOps podcast, Mark Dunning and Sean Espy of TaxOps trade hard-won lessons from inside that fight, and the picture they paint is both sobering and, in its own way, hopeful.
This is not a complaint session. It is a field guide. Between the two of them, Dunning and Espy carry decades of experience across Big Four firms and now TaxOps, and the patterns they describe will be familiar to any CFO, controller, or tax director who has watched a legitimate credit get challenged for reasons that have little to do with the law.
A History Written in Cycles
Espy frames the conversation around a simple truth: IRS enforcement of the R&D credit moves in waves. With more than 26 years in the field, he has watched the agency swing from reasonable to aggressive and back again.
One low point came in the late 2000s, when the agency’s effective opening position on many exams was that essentially nothing a taxpayer claimed qualified for the credit at all. That pressure eventually produced reform, including the ASC 730 safe harbor tied to a later IRS industry directive. By the early 2010s, the agency had rebranded itself as the “kinder, gentler IRS,” and practitioners exhaled.
Then it turned again. In recent years, the IRS retired a large share of its specialized engineering corps — once numbering in the hundreds — and replaced them with newer hires, often pulled directly from industry. That churn created problems, including potential conflicts of interest when examiners are assigned to companies they recently worked for. Newer engineers were frequently trained on positions that did not reflect the actual law, defaulting to the idea that there is no research credit unless you are “creating the wheel.”
The encouraging note: Espy believes the cycle is turning back. More recently, he says, examiners are learning that the reflexive zero position simply isn’t sustainable.
The Long Game
Some of the most instructive lessons come from audits that drag on for years, moving from exam into appeals and through round after round of technical interviews. A recurring theme: examiners may try to reframe genuine design uncertainty as routine work — “you knew what you were going to do; there was no uncertainty there.” The defense team’s job is to interrupt, correct the record, and get the company’s own engineers to affirm that technical uncertainty on the record, since uncertainty is one of the four parts of the credit’s qualification test.
Protecting the record matters. Lengthy technical interviews — sometimes captured by a stenographer — become the evidence that a credit was earned. Procedural discipline shapes outcomes, and cases that look stuck at exam can shift dramatically once they reach appeals.
Bring the Adults to the Room
If there is one tactical takeaway both men return to, it is escalation. Espy calls it “bringing the adults to the room” — going past a line engineer to case managers, territory managers, engineering managers, and higher when a single examiner refuses to engage.
Dunning has lived the same reality. Even in processes designed to be collaborative, practitioners sometimes encounter examiners who treat disallowance as a default and resist any movement. The right move, Dunning says, is not to waste another minute: go straight up the chain.
He adds a note of finesse on the human dynamics. Practitioners often present highly credentialed company engineers — people with patents and advanced degrees — but the trick is doing so without humiliating the examiner. “You can’t offend,” he says, “but you have to sit there and say, hey, this is amazing stuff.”
Turnover, Fast Track, and a Stretched Agency
A recurring villain in these stories is churn. Cases can cycle through many engineers over several years, often leaving a single examiner dug into a zero position with little memory of what came before.
That same understaffing is reshaping strategy. Both men long avoided fast track, wary of being held to an unsupported low percentage. But mass hiring followed by mass attrition has left the agency overloaded, with case inventory running hot. More recently, higher-ups have signaled a push to settle simply because inventory is so high. Fast track still has limits — conflicting facts in a file can lead an appeals officer to kick a case out — but the leverage has shifted.
Documentation Is the Whole Game
Underneath the war stories sits a quieter discipline: the study itself. Espy is blunt that weak work — guesstimating a credit and failing to document it — produces bad cases that hurt everyone. The TaxOps standard, Dunning explains, is building “audit ready” files organized by business component, without over-engineering work a client may never need.
And one rule has held for decades, passed down from a former IRS attorney: never simply hand over all of your binders at once. Do that, and examiners will reissue requests for the same information, then distort the details or fill in the gaps.
The Bigger Picture
For all the friction, both advocates keep returning to purpose. The credit exists, Espy insists, to encourage companies “to go where no one has gone before” — to keep innovation and jobs in the United States. The goal of any audit, Dunning argues, should be the right answer, not a reflexive zero.
For tax leaders, the message is clear: keep standing, document relentlessly, and escalate when an examiner refuses to engage.
Listen to Volume 1 of IRS R&D credit war stories, including the case where a company’s own acquisition wiped out a seven-figure credit before the audit even mattered. Visit https://taxops.com/ to learn more.
About the Hosts
Mark Dunning — Partner, Tax Ops Minimization. Mark Dunning is the managing partner of TaxOps Minimization, where he leads an experienced team in implementing tax-saving projects. He has developed deep technical knowledge of the research credit across all industries, including automotive, engineering, medical, manufacturing and software. Mark is an accomplished negotiator with the Internal Revenue Service and state tax authorities, and has built a positive rapport with field agents across the country. He managed four of the 23 Pre-Filing Agreement projects granted and closed by the IRS in the research credit area. He has also consulted and closed on several IRS and state audit and appeals cases, including the successful completion of two IRS research credit record-keeping agreement projects.
Sean Espy — Sean is a Partner at TaxOps Minimization, bringing more than 25 years of consulting experience spanning public accounting, legal, and industry settings to complex tax minimization engagements. With his experience at top tier public accounting firms, Sean brings a rare combination of technical depth and practical insight to research credit studies. In addition to his consulting, Sean has represented clients before the IRS and state tax authorities in California, Colorado, Kansas, Kentucky, Minnesota, Montana, Ohio, Texas and Utah.
Listen to the full conversation now on Tax Intelligence, or watch on YouTube.
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