The IRS’s new requirements for filing research credit refund claims, which will be effective January 10, 2022, has caused some angst in the tax community. The requirements, outlined in an IRS Chief Counsel memorandum released in October (discussed here), include identifying for each business component, all section 41 research and development (“R&D”) activities, the individuals who performed the activities, and the information they sought to discover from the research. Taxpayers must also provide information required to calculate the R&D credit, including total qualified employee wage expenses, supply expenses, and contract research costs for the claim year. 

Cheryl Teifer, with the Eastern Compliance Practice Area of the IRS’s Large Business & International Division, recently discussed the IRS’s initiative regarding the R&D credit refund claims, which has been underway for over two years. Teifer noted the following:

• The IRS’s initiative was prompted by insufficient detail on refund claims for research credits. In the thousands of claims the IRS receives annually, taxpayers across the spectrum generally only note that the amended return is for an R&D tax credit and include a Form 6765, “Credit for Increasing Research Activities.” Without providing more information, that claim doesn’t meet the “specificity requirement” for administrative refund claims under Treas. Reg. section 301.6402-2(b), which states that “the claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.”
• Under the new requirements, the IRS will be able to assess whether the taxpayer has a “valid or deficient” research credit refund claim. If the claim is valid, the IRS can determine whether it should be paid or requires further review.
• The information required under the memorandum is only for purposes of determining whether a research credit refund claim on an amended return, either Form 1120-X or Form 1040-X, is valid, and is not for addressing the merits of the claim.
• Recognizing that the requirements represent a significant challenge for taxpayers, the IRS has provided a one-year transition period during which taxpayers will have 30 days to perfect a defective claim.
• The IRS is working on FAQs, updating instructions for Form 6765 and Form 3800, “General Business Credit,“ as well as providing taxpayers with a single source for current information and pending updates.

If you anticipate challenges in filing a refund claim for an R&D credit under the new requirements, please reach out to a member of the Research Credits & Incentives team to discuss your situation. Alternately, please feel free to schedule a complimentary one-on-one call with one of our experts.
 

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