This week, the IRS issued guidance further explaining new procedures for research credit refund claims, which were originally outlined in an October 2021 chief counsel memorandum (discussed here). The recent guidance — an IRS internal procedural memorandum and FAQs posted to its website — expands on the rules and alerts taxpayers to what they should expect, but raises additional concerns for taxpayers as they try to navigate through the claim submission process.
Under the new paradigm for research credit claims on amended returns effective January 10, 2022, the IRS must first assess the “validity” of the claim – that is, whether it contains sufficient facts – before considering the claim. Taxpayers must identify:
In the latest guidance, the IRS stood its ground despite concerns raised by the tax community that providing all information each individual sought to discover by business component would be onerous, especially for large companies. The IRS provides some relief for groups of individuals who worked together on research activities seeking the same information by allowing taxpayers to list all those employees together. The IRS addressed some privacy concerns by allowing taxpayers to identify individuals by title or position in lieu of providing specific names, although the names may be required upon substantive review of the claim.
Taxpayers must also provide the information required to calculate the credit, including total qualified employee wage expenses, supply expenses, and contract research costs for the claim year. If taxpayers use statistical sampling (discussed here) to calculate their research credit, the documentation for all units in the sample must contain the required information for each activity. But beware that if the IRS rejects the sampling methodology and determines that the statistical sampling estimate is not adequate, it could deem the entire refund claim invalid because the taxpayer would not have provided the requisite documentation.
The IRS’s internal instructions generally follow the 2021 chief counsel memorandum. One notable change is that during the one-year transition period taxpayers will have 45 days to perfect a deficient claim instead of 30 days noted in the IRS’s initial announcement. Taxpayers will receive a letter indicating the information that must be provided to perfect the claim.
If taxpayers fail to perfect a deficient claim within 45 days during the transition period or submit a deficient claim after the transition period, they will receive a “No Consideration” letter indicating that their claim cannot be processed. Counsel and specified managers must concur before a “No Consideration” letter is issued to the taxpayer.
The IRS plans to review research credit refund claims “expeditiously” and make determinations within six months of receipt. Taxpayers should be aware that for refund claims that include other items, if they do not perfect a deficient R&D credit claim within 45 days during the transition period, the entire refund claim will be rejected. Taxpayers may want to consider whether filing two refund claims would be beneficial to prevent the non-research credit claim from being tied up in a potentially lengthy review process or rejected along with the research credit claim.
If you would like to discuss how best to navigate the new process for filing your refund claim for an R&D tax credit, please reach out to a member of the Research Credits & Incentive Services team. Alternately, please feel free to schedule a complimentary one-on-one call with one of our experts.