Revenue Finds Taxpayer Failed to Properly Support Request for Research Credit

[O]nly when a taxpayer demonstrates that (1) the claimed qualified research is conducted in Indiana, and (2) the employees who participated in the Indiana qualified research projects perform "qualified services," may the wages paid or incurred be considered as the Indiana qualified research expenses. Upon reviewing Taxpayers' documentation, Taxpayers failed to meet the above mentioned statutory/regulatory requirements.
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Taxpayers asserted that they were entitled to Indiana research tax credit as claimed based on the Study, which was inconsistent and unreliable. Taxpayers' 346-page documentation failed to demonstrate that their research projects were Indiana qualified research and the wages were properly allocated to employees who participated in the Indiana qualified research. The audit's disallowance based on the best information available during the audit was therefore reasonable.

Accordingly, given the totality of circumstances, in the absence of other documentation, the Department is not able to agree that Taxpayers have met their burden of proof demonstrating that the Department erroneously disallowed some of Taxpayers' claimed Indiana qualified research credit which Taxpayers claimed paid to their employees who performed "qualified services" of the Indiana qualified research activities and that they were entitled to the Indiana qualified research credit on the wage allocations as claimed.

http://www.in.gov/legislative/iac/20120425-IR-045120168NRA.xml.html