Modern R&D tax reporting: Navigating burden, audit & AI solutions

Key takeaways:

• • • Tax requirements have become more complex — The 2025 R&D credit reporting requirements have become significantly more complicated, demanding detailed business component and expense breakdowns.

    • AI may offer solutions — AI-driven platforms that are aligned with new IRS expectations can offer practical solutions to strengthen substantiation, simplify technical narratives, and ease the documentation burden.

    • Pre-planning and preparation are key — Proactive audit preparation, strategic communication, and awareness of recent IRS procedural changes are critical for successful resolution of R&D examinations.

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This year marks a milestone for the corporate tax community as the tax code’s Section G Research & Development credit reporting enters the mandatory phase for returns exceeding $1.5 million in qualified research expenses or $15 million in gross receipts. Formerly, taxpayers faced little more than two simple fields on IRS Form 6765 — now, however, filers must provide granular detail at the business component level.

These new requirements include breaking out employee expenses (direct, supervisory, and support), and separating additional qualified categories like supplies, computer leasing, and contract research for every component. The new requirements mirror global trends seen in countries such as Germany and France, where R&D credit documentation has historically been much more burdensome.

How documentation has changed

Historically in the United States, many aspects of R&D substantiation were included in the study and not presented on the tax form itself. In June 2024, the IRS released a revised draft of Form 6765 — and provided an update in January 2025 — that included the updated stance demanding transparency. Wherein every business component, its relation to controlled groups, the type of component, and the wage/expense breakdown must be represented on the tax return. The implication is clear: Taxpayers must bolster their documentation, ensuring contemporaneous evidence that is not solely prepared for tax purposes.

Compared to many foreign jurisdictions, especially those in Europe, the US still offers relatively less burdensome requirements; however, this directional shift is unmistakable. Complex, technical project narratives and granular wage allocation are increasingly expected by US tax authorities. The IRS indicates that it presumed all filers already performed this granular breakdown. Now, the reporting burden moves from optional best practice to taxable necessity.

Shifting audit terrain

In a recent webinar on credits, presented by Thomson Reuters and Tax Executives Institute, panelists also discussed audit shifts. Indeed, 2025 brings procedural shifts within the IRS’s audit playbook. Notably, the elimination of the agreement of facts process at the conclusion of Large Business & International audits in early 2026 removes a formal avenue that filers can use to respond to the IRS’s versions of events before the Notice of Proposed Adjustment is issued. This heightens the importance of detailed, factual Information Document Request (IDR) responses throughout the entire audit, ensuring a well-documented appeals record if needed.

Additionally, tools like the Accelerated Issue Resolution (AIR) and Fast Track Settlement programs are expanding. These initiatives streamline multi-year disputes and improve the odds of reaching taxpayer-favorable outcomes, particularly as IRS management and appeals officers seek more efficient, resource-aware resolutions. Recent experience shows a trend: Fast Track settlements are securing more positive outcomes for taxpayers — sometimes even when the parties are far apart on the numbers.

State audits add their own complexity, especially because many states don’t recognize federal Accounting Standard Codification 730 directives. Tax departments must proactively develop full substantiation for state reviews, rather than relying solely on federal documentation standards or shortcuts. Partnering with audit-experienced professionals, especially those with IRS backgrounds, can further improves audit results.

Turning burden into benefit

The new mandates from Section G are not a signal to retreat from claiming the credit. Despite elevated standards, the credit remains a vital incentive for businesses. Rather than being deterred, corporate tax departments can use this to bolster their requests for more technology investment, including AI-driven tools and solutions.

The arrival of advanced generative AI (GenAI) models makes R&D credit substantiation faster and more precise than ever before. These tools have capabilities that include:

• • • Ingesting and organizing vast quantities of technical and operational documentation into IRS-compliant formats
    • Translating technical jargon into tax-speak, ensuring that every business component gets a concise, accurate, and compliant technical narrative
    • Assisting in quantifying R&D time at the individual level, mapping granular time and activities to precise expense categories
    • Generating contemporaneous documentation referenced directly to underlying evidence or regulatory authority for bulletproof

Corporate tax professionals also can take tedious and manual tasks —  such as interviewing engineers, mapping activities, and defending allocations — and now use AI to manage this work at scale. Real-time views of qualified R&D activity, lessened reliance on labor-intensive surveys, and immediate provisioning all contribute to faster, more rigorous studies, bigger credits, easier audits, and happier R&D teams.

Preparing for 2025 returns and beyond

There are several actions that corporate tax teams can take now to prepare for 2025 returns, including:

• • • Embrace AI and contemporary documentation workflows to meet new substantiation and reporting burdens
    • Build IDR responses, audit narratives, and documentation as if they will be reviewed in appeals or in court — precision and completeness are paramount
    • Cultivate constructive auditor relationships, whether federal or state, with a mindset focused on problem-solving rather than confrontation
    • Consider Fast Track and AIR strategies for accelerated and possibly more favorable dispute resolution in multi-year credit audits
    • Continually monitor IRS and state developments, regulatory guidance, and prominent cases as precedents shift norms and expectations.

R&D credit compliance has evolved from simple reporting to sophisticated, data-driven substantiation. With increased detail required for every dollar claimed, corporate tax departments must adapt quickly.

They now need to be leveraging advanced technology, have subject matter expertise, and create more transparent auditor relationships. Having AI-powered tools is a necessity to making more accurate credits and smoother audits a tangible reality. The bottom line is that R&D credits are valuable and corporate tax department teams will now need to invest time and expertise to get them right.

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You can find more about how tax professionals are planning for future tax changes here