IRS Clarifies Required Information for Valid Research Credit Claims for Refunds
The IRS announced more detailed instructions regarding specific information that taxpayers are required to include when making research credit claims for refund. The clarification was released in a new Chief Counsel memorandum published by the IRS on October 15, 2021.
The IRS Office of the Chief Counsel released its legal advice memorandum (Chief Counsel Legal Advice Memorandum 20214101F) about the information that taxpayers must include to file valid refund claims specific to the Credit for Increasing Research Activities (Internal Revenue Code Section 41). According to the IRS release, although current Treasury Regulations require that refund claims set forth sufficient facts to apprise the IRS of the basis of the claims, the legal advice memorandum will improve tax administration by providing clearer instructions for eligible taxpayers to claim the credits, reducing the number of disputes over such claims (See IR-2021-203).
Under the guidance within the Chief Counsel Memorandum, taxpayers would be required to provide a significant amount of information or risk not filing valid and timely claims for refund. The guidance specifies that taxpayers making refund claims for the R&D credit must include the following information:
- All the business components to which the R&D credit claim relates for that year
- For each business component, the following additional information should be provided:
- All research activities performed
- All individuals who performed each research activity
- All the information everyone sought to discover in the context of the research activity
- The total qualified employee wage expenses, total qualified supply expenses, and total qualified contract R&D expenses for the claim year (which may be done using Form 6765, “Credit for Increasing Research Activities”)
According to the memorandum, the information required must be provided in written statements signed under penalty of perjury when the refund claims are filed, rather than through the production of documents. If taxpayers provide documents, such as R&D credit studies, the taxpayers must specify in statements the exact page(s) in the documents that support the facts cited above. If taxpayers submit separate written statements, each one must be signed under penalty of perjury.
Under the memorandum, refund claims that do not include all the requisite information will be treated as deficient, which jeopardizes the ability of taxpayers to obtain refunds or file refund suits.
Authoritative Value of the Memorandum
A legal advice memorandum is signed by executives in the National Office of the Office of Chief Counsel and issued to Internal Revenue Service personnel who are national program executives and managers. The memoranda are issued to assist IRS personnel with administering their programs by providing authoritative legal opinions on certain matters, such as industry-wide issues. The memoranda cannot be used or cited as precedent.
What is Next?
The IRS will provide a grace period until Jan. 10, 2022, before requiring this information to be included with timely filed R&D credit claims for refund.
Once the grace period expires, a one-year transition period will then begin during which taxpayers will have 30 days to perfect R&D credit claims for refund prior to the IRS final determination on the claims.
The IRS is scheduled and will need to provide additional information to help taxpayers comply with the new procedures, but the Memorandum indicated that taxpayers may begin to immediately provide the required information within a current R&D credit claim for refund.
The IRS intends to keep engaging with stakeholders about issues related to the research credit. Comments can be emailed to IRS.Feedback.RECredit.Claims@irs.gov.