IRS Mandates Additional Requirements for R&D Tax Credit Refund Claims

IRS Mandates Additional Requirements for R&D Tax Credit Refund Claims

In 2007, the IRS made the Research & Development (R&D) tax credit a Tier 1 issue. Tier 1 issues were those of high strategic importance that had a significant impact on one or more industries, essentially meaning that the IRS would audit taxpayers filing amended returns on such issues. To taxpayers’ relief, the Tiered Issue Process was eliminated in 2012, effectively placing the R&D tax credit in the same audit pool as other issues.

After the IRS was defeated on two refund claims stating that the taxpayers’ claims lacked specificity and they had failed to state a claim, the courts held that the IRS could no longer assert their own forms (Form 6765) were insufficient to constitute a refund claim.

As a result of losing these claims, the IRS announced in a Chief Counsel memo released October 15, 2021 that taxpayers seeking refunds attributable to the R&D tax credit must meet the following five requirements:

  • Identify all the business components to which the research credit claim related for that year.
  • For each business component:
    • Identify all research activities performed;
    • Identify all individuals who performed each research activity; and
    • Identify all 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.

The new rules go into effect on January 10, 2022. The IRS has stated there will be a transition period for a year and a grace period, giving taxpayers 45 days (expanded from 30 days on January 5th) to “perfect” a claim for refund before it comes mandatory for all refund claims.

What does “perfect” mean? If a claim for refund is determined to be deficient or if information provided was insufficient, the taxpayer will have 45 days to provide missing information. If the IRS does not receive the information requested, the entire refund claim will be rejected.

By issuing this new guidance, it has put R&D refund claims back into the forefront of IRS audit scrutiny akin to a Tier 1 issue, making R&D refund claims more burdensome for a taxpayer. The IRS new requirements further demonstrate the need to utilize a qualified R&D tax credit professional to properly document all refund claims.

The R&D Tax Credit is a federal benefit given to companies that develop, design, or improve products, processes, formulas, or software. Many processes and activities qualify for the research credit. The R&D tax credit can be claimed by any company for both current and prior tax years. Are you eligible? » Contact our R&D experts

About the Authors:

Lacey Robb, JD, LLM, is a Principal and the R&D Tax Credit Practice Leader. She is an attorney and has an LLM in Taxation and has helped numerous taxpayers in a variety of industries maximize their R&D tax credit claims. » Full Bio

Alexander Bagne, JD, CPA, MBA, CCSP is the President of ICS Tax. His expertise includes fixed asset reviews, cost segregation, the 179D and 45L energy efficiency incentives, accounting methods, research tax credits, and IC-DISC export incentives. » Full Bio