IRS Releases New Guidance on R&D Credit Refund Claim Procedure

 

TAX ALERT

The Internal Revenue Service (IRS) released a memorandum (LB&I-04-0122-0001) and FAQs that provide procedural guidance for applying Field Advice 20214101F regarding R&D credit refund claims on amended tax returns filed on or after Jan. 10, 2022. A few key points to note are:

1. The Field Advice effective date remains Jan. 10, 2022.
2. After Jan. 10, there is a one-year transition period allowing taxpayers 45 days (instead of the previously stated 30 days) to ‘perfect’ a claim that does not provide the five items of information listed below.
3. Even if a refund claim includes both an R&D credit claim and other claims, the IRS asserts that it can reject the entire claim if the five items of information are not provided within the 45-day period.
4. Taxpayers utilizing statistical sampling to compute the R&D credit must provide with the claim for refund the first four items of information for all units in the sample along with total qualified wages, supplies and contract research for the claim year. Thus, statistical sampling still stands as a valid technique for an R&D credit study.

In October 2021, the Field Advice stated the IRS’s view as to the information needed to satisfy the specificity requirement for an R&D credit refund claim under Reg. sections 301.6402-2(b), which was covered in a previous tax alert. The IRS states that taxpayers are required to identify the following information at the time the refund claim is filed with the IRS:

1. Identification of all business components to which the section 41 research credit claim relates for the claim year
2. All research activities performed by business component
3. All individuals who performed each research activity by business component
4. All the information each individual sought to discover by business component
5. Total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year

Transition period and time to perfect

Claims filed during the transition period (Jan. 10, 2022 through Jan. 9, 2023) that do not include the five items of information will be given 45 days to perfect an R&D claim for refund prior to the IRS’ final determination on the claim. Taxpayers that fail to provide the required information with their claim will be notified with Letter 6428 (Claim for Credit for Increasing Research Activities – Additional Information Required). The 45-day period starts from the date Letter 6428 is issued. If sufficient information is not provided during the 45-day period, the claim will be considered deficient and taxpayers will be issued Letter 6430 (No Consideration, Section 41 Claim).

Claims filed after the transition period ends

Claims filed on or after Jan. 10, 2023 that do not include the five items of information do not have the opportunity to perfect. The full memorandum contains more detail regarding deficiency and claims coordinator procedures. The revisions include IRM 4.1.1, IRM 4.10.11 and IRM 4.46.3. According to the FAQs, taxpayers utilizing a statistical sample to compute the credit are still required to provide the first four items of information for each unit of the sample along with total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year. Additionally, the FAQ noted that the entire claim for refund will be rejected if the IRS does not receive any missing information within the 45-day period, even if the refund claim contains other items in addition to R&D credits.