Claim reduced on review

A tax authority can review a claim after it has been paid, within time limits set by law, and it can reduce the claim if it decides that some of the work or the costs did not qualify.1Source 1A tax authority can review a claim after it has been paid, within time limits set by law: Internal Revenue Code section 6501 (United States); Finance Act 1998 Schedule 18 paragraphs 24 and 46, via HMRC Enquiry Manual EM1510 and Compliance Handbook CH51300 (United Kingdom); Taxes Consolidation Act 1997 section 959AA, via Revenue Notes for Guidance Part 41A (Ireland); Income Tax Act section 152(3.1) and (4) (Canada); Income Tax Assessment Act 1936 section 170, Income Tax Assessment Act 1997 section 355-705 and the ATO, Request an amendment to a business or super tax return (Australia); Tax Administration Act 1994 section 108, via Inland Revenue SPS 20/03 (New Zealand); Income Tax Act 1947 section 74 (Singapore). More detail on your country page. When that happens, two separate things are decided by two separate documents: the law of your country decides what you owe the tax authority, and your engagement letter decides what, if anything, the adviser owes you.

What you owe the tax authority

The claim was made in your name. If it is reduced, the business repays the difference, with interest where it applies and sometimes a penalty, and those usually fall on the business rather than on whoever prepared the claim.2Source 2The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page. The amounts, the interest rules and the penalty rules differ by country, and the page for your country sets them out with the official sources. Whether a penalty applies, and how large it is, can depend on how the error arose, and the rules differ by country, which is one reason to take advice before you reply.

What your contract says

Three clauses decide what the adviser does now. The review and audit support clause says whether help with the review was included, what it covers and whether it has ended. The fee refund clause says whether the fee is recalculated on the amount finally agreed, and whether any part comes back. The liability clause says what, if anything, you could recover beyond that. If the letter is silent on a point, do not assume the fee changes: ask a lawyer what applies in your country.

Read all three before you write to the adviser, so that you are asking for what the letter provides rather than what you hoped it provided.

What to do first

1. Take advice from someone who can see the letter, the claim and the tax authority's letter, before you respond to anyone.
2. Gather the file: the claim as filed, the working papers, the engagement letter and every email with the adviser about the claim.
3. Write to the adviser. Ask what support the letter provides and who will give it, whether the fee is recalculated under the letter, and for a copy of anything in the file you do not have. Keep the tone plain; the scripts show the register.
4. Keep the fee question separate from the tax question. A disagreement about the fee is a fee dispute, and it is not a reason to stop dealing with the tax authority's questions on time.
5. If the review raises doubts about other years, read correcting a claim, and take advice before you contact the tax authority about them.

Read next

• If you are charged a penalty and getting independent advice
• The question: how do you handle a tax authority review?
• Myth: the adviser is responsible if it goes wrong. Case study: when the review letter arrived

Sources

1. A tax authority can review a claim after it has been paid, within time limits set by law: Internal Revenue Code section 6501 (United States); Finance Act 1998 Schedule 18 paragraphs 24 and 46, via HMRC Enquiry Manual EM1510 and Compliance Handbook CH51300 (United Kingdom); Taxes Consolidation Act 1997 section 959AA, via Revenue Notes for Guidance Part 41A (Ireland); Income Tax Act section 152(3.1) and (4) (Canada); Income Tax Assessment Act 1936 section 170, Income Tax Assessment Act 1997 section 355-705 and the ATO, Request an amendment to a business or super tax return (Australia); Tax Administration Act 1994 section 108, via Inland Revenue SPS 20/03 (New Zealand); Income Tax Act 1947 section 74 (Singapore). More detail on your country page.  Back
2. The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page.  Back