Ensuring Audit Readiness for Your R&D Tax Credit
A tax audit can be unsettling but it doesn’t have to be. Companies that prepare their funding applications, project documentation, and supporting evidence thoroughly from the outset are on the safe side.
A structured approach helps avoid common risks and ensures compliance with the requirements of the R&D tax incentive long before an audit even takes place.
R&D Tax Credit Audits: What Companies Need to Know
More and more companies are making use of the R&D tax credit. At the same time, audits related to these claims are increasingly coming into focus. What exactly is reviewed, which documents are required, and how to proactively avoid follow-up questions from the tax authorities.
Since January 1, 2020, companies in Germany have been able to benefit from tax incentives for research and development projects under the R&D Tax Incentive Act (Forschungszulagengesetz – FZulG). This legislation complements existing income and corporate tax laws by introducing targeted support for innovation across companies of all sizes and industries. With the Growth Opportunities Act passed in 2024, the R&D tax incentive has been further expanded and strengthened. The key changes at a glance:
1. Increase in eligible expenses, particularly personnel costs
2. Clear requirements for documentation and supporting evidence
3. Expanded definitions of eligible projects, e.g. collaborations and digitalization initiatives
These changes not only enhance the attractiveness of the R&D tax incentive but also increase the importance of thorough preparation for tax audits.
More Than Five Years of R&D Tax Credits in Germany: What Comes Next?
After more than five years and numerous approved projects, the R&D tax incentive is increasingly coming under the scrutiny of tax audits. These audits play an important role in ensuring that funding has been applied for correctly and used in compliance with the regulations.
It is therefore likely that tax authorities will, in the near future, take a closer look at funded projects, the allocation of resources, and the underlying documentation. This creates uncertainty on both sides: while many companies are unsure what to expect during an audit, tax authorities themselves still lack extensive experience and standardized assessment criteria.
This can quickly lead to conflicts—especially when relevant documentation is missing, supporting evidence is incomplete, or the eligibility of individual projects is no longer clearly demonstrable in retrospect. To avoid uncertainties or follow-up questions from the outset, it is essential to understand which aspects must be carefully considered when applying for the R&D tax incentive.
Whitepaper: R&D Tax Credit Audit
Our exclusive whitepaper provides in-depth answers to your key questions regarding audits of the R&D tax incentive. Learn about potential tax risks throughout the application process and how to strategically embed compliance into your R&D activities. As a valuable resource, it is specifically designed for companies aiming to implement their research and development projects successfully and with long-term resilience.
What to Expect in an R&D Tax Credit Audit?
One of the key audit risks in the context of the R&D tax incentive lies in insufficient documentation and inaccuracies in reported information. Companies that have claimed the incentive must ensure comprehensive and transparent documentation of their R&D projects.
This includes, in particular, detailed information on project content, timelines, resources deployed, and costs incurred. A critical element is also the ability to demonstrate that the activities carried out genuinely qualify as eligible research and development.
A common example is the systematic tracking of working hours for involved employees, ideally on a project-specific basis.
Risk of Inadequate Documentation
Failure to comply with statutory documentation requirements—or the absence of key supporting evidence—can have significant consequences for companies. In addition to the repayment of previously granted tax credits and potential interest charges, serious violations may even raise suspicions of subsidy fraud, which can lead to criminal liability.
To avoid uncertainties or follow-up inquiries from the outset, it is essential to understand which aspects must be carefully addressed during both the application and documentation process. Comprehensive, audit-ready documentation is critical to ensuring the compliant and secure use of the R&D tax incentive.
Structure Creates Confidence
As experts in R&D funding, we support companies throughout the application process and in establishing structured, audit-ready documentation for their R&D projects. We place particular emphasis on ensuring that all supporting evidence is prepared clearly, consistently, and in full compliance with audit requirements.
Our experience shows that a structured and well-founded approach is key to being well prepared in the event of a tax audit.
For complex tax-related matters—such as the allocation of specific cost items or the tax treatment of individual funding elements—we recommend engaging specialized tax advisors, such as WTS Germany. We are happy to facilitate an introduction if needed.
“Tax audits can be intimidating — especially when it comes to funding programs. Our role is to support companies with our expertise in the R&D tax incentive and transparent documentation, putting them in a position to approach any audit process with confidence and composure.”
Dr. Markus Busuttil, CEO & Gründer
Frequently Asked Questions
We regularly receive similar questions from our clients regarding tax audits in the context of the R&D tax incentive. We have compiled the most important answers for you in a clear and concise format.
What can companies expect during an R&D tax credit audit?
The tax authorities review whether all requirements have been properly met—particularly the project content, the BSFZ certification, the cost breakdown, and the supporting documentation. This may involve requests for digital records as well as on-site audits.
As part of the application process, we ensure that all required documentation is prepared in full and closely aligned with you, so that you are optimally prepared in the event of an audit. Our work lays the foundation for a smooth audit process—while the final tax assessment and execution remain the responsibility of the relevant authorities and tax experts.
What documents do I need to prepare?
Key documents include the BSFZ certification, project-specific time tracking records, cost breakdowns, activity descriptions, and project reports, as well as all supporting evidence demonstrating the eligibility and proper classification of R&D activities.
We ensure well in advance of any audit that all relevant documentation is complete, clearly structured, and readily accessible at all times—fully aligned with your internal processes.
What happens if issues are identified during the audit?
If the tax authorities conclude that requirements have not been met or that the provided information is insufficiently substantiated, this may result in reductions or repayments of the tax credit—including potential interest charges.
In more serious cases, there may even be initial suspicion of subsidy misuse. To mitigate such risks, a structured and proactive approach to preparing project-related documentation is essential.
Who can I contact if I have questions?
For content-related questions regarding R&D funding—such as project eligibility, the application process, or documentation—the experts at Busuttil & Company are always available to assist you.
For tax-related matters, particularly in connection with audits or the tax treatment of funded projects, we are happy to connect you with our partner, WTS Germany. As a full-service tax advisory firm, they can provide comprehensive support based on in-depth expertise.