BUSINESS

Your Money: IRS now requires additional documentation for R&D credit refund claims

By Michael De Prima

On Oct. 15, 2021, the IRS announced it is requiring additional documentation to be submitted by taxpayers seeking refunds attributable to the research and development (R&D) tax credit under Internal Revenue Code §41. The Chief Counsel memo issued by the IRS spells out the new requirements, which generally involve the taxpayer’s underlying research activities and projects. Although routinely requested during IRS audits, these items have not previously been required when submitting a valid R&D credit claim for refund.

Take note that there will be both a grace period and a transition period before the requirements become mandatory for all R&D credit refund claims.

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Meanwhile, commentators have expressed concern that the new requirements are overly burdensome and will discourage taxpayers from filing legitimate refund claims.

In its news release, the IRS said it receives thousands of R&D credit claims each year for credits in the hundreds of millions of dollars, and such claims consume substantial agency and taxpayer resources. The new guidance is intended to create more effective and efficient tax administration, according to the agency.

The Chief Counsel memo states that taxpayers must now provide “essential pieces” of information that will apprise the IRS of the basis for an R&D credit refund claim. These items are described as “foundational criteria” that will allow the IRS “to screen a refund claim for potential validity or audit necessity …”

To comply with the specificity requirement per the memo, taxpayers must (at a minimum):

Identify all business components to which the R&D credit claim relates for the tax year

For each business component:

  • Identify all research activities performed
  • Identify all individuals who performed each research activity
  • Identify all the information each individual sought to discover

Provide the total qualified research expenses being claimed, which may be done using Form 6765, Credit for Increasing Research Activities

The memo goes on to say that taxpayers who have a credit study prepared need not submit it with their claims. However, if one is submitted, the taxpayer must identify the specific facts and pages in the study that address the required information outlined above.

When a claim is filed not meeting the minimum requirements, the memo directs the IRS to reject it as invalid. Such a rejection may preclude the taxpayer from perfecting the claim. In effect, the IRS is saying that a deficient claim may leave the taxpayer with no remedy whatsoever to amend or perfect it, or for judicial review.

Michael De Prima

The IRS release states that a grace period is being given to taxpayers until Jan. 10, 2022, before inclusion of the new information will be required. Additionally, there will be a one-year transition period following the grace period during which taxpayers will have 30 days to perfect a refund claim. In other words, assuming the IRS’s position is enforceable, taxpayers will have one shot at making a valid refund claim beginning in January 2023.

There has been swift criticism from commentators over the punitive impact this guidance may have on taxpayers trying to file legitimate refund claims, and more disapproval is likely on the way as practitioners and industry groups coordinate their opposition. Although many questions are left unanswered in the memo, taxpayers must nonetheless — for the time being — consider it when pursuing R&D refund claims.

For more information on R&D refund claims, contact Michael De Prima at michael.deprima@CLAconnect.com or 303-439-6093. For more information on CliftonLarsonAllen LLP, visit CLAconnect.com.