On January 3, 2022, the Internal Revenue Service (IRS) Office of Chief Counsel released Interim Guidance stating that taxpayers will be required to include additional documentation for a research credit claim for refund to be considered valid.
Specifically, the new guidance provides that for an Internal Revenue Section 41 (IRC § 41) research credit claim for refund to be considered a valid claim, taxpayers must submit the following five essential pieces of information at the time the refund claim is filed with the IRS:
- List all the business components that relate and support the research credit for the claim year. IRC § 41(d)(2)(B) defines business components.
- Describe all the research activities performed by the business component. For example, this must include a description of what the taxpayer did and how they did it by business component.
- Identify the full name and title of the individual(s) who engaged in the research activities by business component. This can be in a list, table, or narrative format.
- Detail all the information each individual sought to discover by business component. This can be in a list, table, or narrative format.
It is also required that the taxpayer must sign a declaration under the penalties of perjury confirming that the facts and circumstances provided are correct. Typically, the signature on Forms 1040X or 1120X of the amended return satisfy this requirement.
The new rules were in effect beginning January 10, 2022. Originally the IRS stated that there will be a transition period for R&D Tax Credit claims filed between January 10, 2022, through January 9, 2023. During this one-year transition period, taxpayers will be given a grace period of 45 days to perfect a claim for refund if it is determined by the IRS to be deficient. This means that if the claim is determined to be inadequate by the IRS, taxpayers will be given 45 days to provide the missing information. If the taxpayer is unable to provide the information required, the refund claim will be rejected. In subsequent tax years following the one-year transition period, any refund claim that is determined to be deficient will be denied altogether and the taxpayer will not be granted any grace period to perfect the claim. However, on October 30, 2023 the IRS extended the transition period for correcting refund claims related to the research credit through January 10, 2025. The taxpayers are given 45 days to perfect their claim for refund, prior to IRS’s final determination on the claim.
The frequently asked questions (FAQs 7, 9, 17 and 20) on this topic have also been updated. During the transition period, taxpayers will be notified of a deficient claim by Letter 6426C or 6428. Taxpayers may supply the required data as part of the explanation or as an attachment to the claim for refund.
This new IRS guidance heightens scrutiny for R&D refund claims. It further illustrates why a taxpayer should contact a qualified R&D tax credit professional to properly document all refund claims. We recommend that you contact our team today to help you strategize how to properly support and maximize your tax credits and incentives claims.
Joyce Kandt, principal, leads the firm’s tax credits and incentives practice. Contact Joyce today regarding your eligibility and for an assessment of potential credits.
Aura Advisors is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.