An Update on Kyocera and What It Means For You

Last summer, we wrote a post called “The Kyocera Section 41 Case Should be a Wake-Up Call” about the precariousness of relying exclusively on interviews to deliver the necessary proof to the IRS on an R&D filing.

As we explained then:

“In July, the government moved for a summary judgment ruling that Kyocera AVX, the multinational ceramics and electronics manufacturer, is not entitled to the $1.3 million amended Section 41 R&D Credit they recently claimed. The company had hired ​​PricewaterhouseCoopers (PwC) to make the filing, and the accounting firm did interviews with subject matter experts to compute the eligible amount of Section 41 credits they could claim for the tax years 2017-2020. PwC found $1.3 million worth of unclaimed credits, which they filed in the amended Section 41 study. But, ultimately, the IRS claims that the R&D Study and documentation provided were not sufficient to support the claim, and when the IRS requested additional documentation to support the claim neither Kyocera nor PwC could produce it.

Two of the government’s objections in its case against Kyocera are especially relevant to any company that files for an R&D tax credit: 1) “The PwC study exclusively relied on interviews to determine employees' time spent on projects; it did not use documentation” and 2) “Kyocera does not have a centralized system for tracking employee time, and generally does not track employee time on projects.”

The IRS has been emphasizing the necessity of contemporaneous documentation for decades, as far back as Eustace v. Commissioner in 2002. But this recent motion for summary judgment against Kyocera could mark a potential shift towards a stricter application of their long-standing policy.

The direction seems clear—reliance on after-the-fact interviews without supporting documents is increasingly untenable.”

With the Kyocera case back in the news [see: “Kyocera Now Owes $13 Million in Years-Running Tax Row, IRS Says” and “Kyocera Widens Court Dispute With IRS Over Research Tax Credits”], it’s clearly time for an update.

What’s New?

A district judge in South Carolina has ruled that all the issues being disputed by Kyocera and the IRS are the exclusive jurisdiction of the Tax Court, meaning the two big questions being legislated will be settled in that court.

The first issue is the same one we covered in the earlier post: in 2022, Kyocera filed a still ongoing suit arguing that they are entitled to a revised Section 41 R&D Credit worth $1.3 million based on 2018 R&D work completed and $5.73 million via a reduced transition tax liability credit under Section 965. The government disputes that they have the documentation to prove that they are owed that amount.

The second issue, which brought the case back into the headlines, is a fascinating one: on March 12, the government countersued Kyocera, asserting that they’d received a $13.36 million 2018 tax refund in error, and that they now owe the government $13.36 million plus interest.  
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Why It Matters?

The case, at its core, is about an amended return: a place where the IRS scrutiny is often higher. But the argument the government is putting forth can be read as yet another signal that the IRS is increasingly skeptical of after-the-fact interviews without supporting documentation.

Many companies now have built in contemporaneous data systems — in the forms of Jira and GitHub. But it seems that it’s becoming increasingly important to assure that that data is being used in your filing.

The IRS disputed the R&D tax credit claims due to inadequate substantiation of the research activities claimed under Section 41. The agency focused on the lack of contemporaneous documentation, relying instead on retrospective estimates from interviews conducted by PwC long after the fact. This method was seen as inadequate in the eyes of the court; they demanded a more rigorous substantiation to prove that the activities qualified as R&D.

As the IRS put it: they will rely less on oral testimony, which it says should be “filling the potholes, not paving the road.”

The years-long litigation has undoubtedly been extremely costly for Kyocera, and it also is not the kind of headlines you’d ever want as a company. On top of that, the actual outcome is still very much in the air. There’s a world where Kyocera loses out on both the $7 million in credits it believes it’s owed and has to pay upwards of $13 million back to the IRS.

Certainly, there’s also a world where they win. But the key takeaway for companies is what this signals and what to do to avoid finding yourself in a situation like this one. 

Real-Time Data Remains the Gold Standard for Compliance

By accessing data from systems such as Jira and GitHub at the time of tax preparation, Neo.Tax’s platform can automatically extract, classify, and substantiate qualifying R&D activities. This method aligns with the IRS's emphasis on contemporaneous records. The agency prefers these types of records because they are more reliable than verbal recollections or documentation created far after when the activity occurs — certainly, an engineer creating a timesheet of his work at the end of the month is likely more accurate than asking them to recollect their work on a project completed a year, or multiple years, in the past.

Unlike traditional R&D studies conducted by large accounting firms, which rely on retrospective interviews and questionnaires, Neo.Tax’s solution utilizes real-time data to support R&D credit claims. This direct link to project-specific activities minimizes reliance on employee recollection and significantly enhances the accuracy and defensibility of claims during IRS audits.

Neo.Tax’s technology not only protects taxpayers in the case of an IRS audit, but also provides the additional, IRS-mandated information required when claiming an R&D tax credit refund via an amended Federal tax return. If taxpayers are looking to find value in their research activities in their current tax year or previous tax years, Neo.Tax can help.

We often speak of the way our AI solution saves time for controllers, heads of tax, and engineers by eliminating the need for time-consuming retrospective interviews. But the Kyocera case highlights another, far more stark and costly risk of relying on memory and estimations for look-back claims. The IRS is making it clear that they’re emphasizing the need for contemporaneous data. Companies who rely on the R&D credit should take note.