Changes

Effective January 10, 2022, the IRS will require all research and development credit (Sec 41) refund claims include supporting documentation. The intention is that credit claims will be reviewed at the time of submission. The IRS will use the supporting documentation to determine if a credit claim for refund should be paid immediately or whether a more detailed review is needed. Therefore, all research and development tax credit claims must include the following documentation:

• Identify all the business components to which the Section 41 research credit claim relates for that year.
• For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover.
• Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. This may be done using Form 6765, Credit for Increasing Research Activities

You may immediately begin including the documentation with your submissions; however, it is not mandatory until January 10, 2022. With the effective date also comes a one-year transition period during which the taxpayer is allowed 30 days to hone their claim before the IRS makes a final determination.

Reasoning

The additional information required comes on the heels of recent R&D tax credit cases addressing research credit claims, such as Little Sandy Coal Company Inc. v. Commissioner. But it also extends the legal fight on a procedural level, citing cases such as Premier Tech, Inc. v. United States and Harper v. United States, where the IRS has sought to dispose of R&D claims based on various procedural issues. 

Effects

Everyone filing an R&D credit refund claim will need to ensure they are meeting the new requirements. The taxpayer needs to ensure they provide the most detailed and accurate data to aid in the approval of the claim. The CPA will likely no longer sign a return that only includes calculations. And, as R&D credit experts, we will need to start studies earlier and be completed sooner to ensure filing deadlines are met and the necessary documentation is included.   

Thoughts

As with all procedural changes, there is a certain wait and see mentality to understanding the full ramifications. As a result, there are undoubtedly many questions that come to mind when reading the IRS memos, such as audit rate changes, denial procedures, protests, timing, and a host of others. For example, for companies claiming the credit without the required documentation, you will need to immediately consider how you can meet the new criteria. Likewise, CPA firms that do not provide the service need to refer their clients to providers that can meet the new requirements successfully. Finally, for companies utilizing the services of R&D credit study providers, the roadmap of your project will realize a complete overhaul.

If you are currently claiming the R&D credit or plan to begin claiming it in the upcoming tax year, it is time to understand how to navigate these changes. Please reach out to a member of the Research Credits & Incentives team to get more info. Alternately, please feel free to schedule a complimentary one-on-one call with one of our experts.

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