Research Credit Refund Claims
The IRS recently released new guidance for taxpayers who wish to apply for a research credit refund claim. Taxpayers will have an increased documentation burden as additional information is required to have a refund claim be valid under Treasury Regulation Section 301.6402-2(b)(1). The IRS Office of Chief Counsel’s legal advice is the result of ongoing efforts to manage research credit issues and resources in the most effective and efficient manner. By requiring taxpayers to provide the information referenced below, the IRS will be better able to determine upfront if a research and experimentation (R&E) credit claim for refund should be paid immediately or whether further review is needed.
The IRS will provide a grace period until January 10, 2022, before requiring the inclusion of this information with the timely filed §41 research credit claims for refund. Upon the expiration of the grace period, there will be a one-year transition period during which taxpayers will have 30 days to perfect a research credit claim for refund prior to the IRS’s final determination on the claim.
IRS Memorandum 20214101F Requirements
- For a taxpayer’s refund claim for the Internal Revenue Code (IRC) §41 research credit to be valid, the taxpayer must, at a minimum:
- Identify all the business components to which the IRC §41 research credit claim relates 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)
- A taxpayer must provide a declaration signed under the penalties of perjury verifying that the facts provided are accurate. In most cases, the signature on Form 1040X or Form 1120X serves this function. In addition, a taxpayer should provide the facts in a written statement rather than through the production of documents. However, if a taxpayer provides documents, including a credit study, the taxpayer must specify the exact page(s) that supports a specific fact. A mere volume of documents will not suffice to meet a taxpayer’s obligation.
- For the statute of limitations for credit or refund claims, there are no statutory provisions specific to IRC §41 research credit claims. In general, taxpayers may be entitled to a credit or refund only if they have filed a valid claim within three years of the date the Form 1040 or Form 1120 was filed or two years from the time the tax was paid, whichever period expires later. The amount of the credit or refund shall not exceed the portion of the tax paid within the period immediately preceding the filing of the claim equal to three years plus any extension of time for filing the return. If no claim was filed within such three-year period, the amount of the credit or refund shall not exceed the portion of tax paid during the two years immediately preceding the filing of the claim (IRC §6511).
Legal Requirements of Refund Claims
Refund claims may be made on either original returns or amended returns. This memorandum is directed at the specificity requirement of the Treasury Regulations and how taxpayers may meet the requirement, as outlined below.
IRC §41 and case law set out the legal requirements for claiming the research credit. This memorandum is not intended to be a comprehensive review of the law associated with the claiming of a research credit; it addresses only those portions of the law that must necessarily be considered in a refund claim for the claim to be valid under the Treasury Regulations.
- The Specificity Requirement of Treasury Regulation §301.6402-2
- Sufficient Facts Must be Provided for a Claim to be Valid
Section 301.6402-2 of the Treasury Regulations prescribes how a taxpayer makes a refund claim, including when the claim may be filed, what forms may be used, the location for filing, signature requirements, and other procedural elements. A valid refund claim must, along with other requirements not discussed herein, “set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.”
It’s important for taxpayers to evaluate if they can meet the minimum burdensome documentation efforts required if contemplating a research credit refund. Taxpayers who chose to not file for the research credit every year (even though research is still being performed) and amend should strongly reconsider their process. It’s now more important than ever to evaluate potential research credit activity in a current tax year. We recommend reaching out to a trusted advisor to discuss the best documentation process to meet current research credit claims.
For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.