New R&D credit documentation requirements clarified

The IRS has provided advice to taxpayers and internally on its new documentation requirements for Sec. 41 Professional tax credit for increasing research activities (the R&D credit).

Guidance for taxpayers comes in the form of 16 Frequently Asked Questions (FAQs) posted on the IRS website Wednesday. At the same time, the IRS issued internal guidelines for its employees in the form of a memo and revisions to its Internal Revenue Manual (IRM).

The new requirements come into effect on January 10, 2022. An R&D credit refund request on an amended return must contain certain specified pieces of information before it can be considered to meet the specificity requirement of the Regulation. Second. 301.6402-2 (b) (1) containing sufficient information as to the grounds and facts on which the claim is based. This is a threshold requirement for the IRS to accept the request as valid.

According to the FAQ, applicants must:

  • Identify all the business components to which the complaint relates for the year of the complaint;
  • For each business component, identify all research activities carried out, name the people who carried out each research activity and specify the information that each person sought to discover; and
  • Provide the totals for the tax year of skilled employee salary expenses, qualified procurement expenses, and qualified contract research expenses (which can be performed using Form 6765, Credit for increased research activities).

FAQ says IRS likely won’t follow AICPA’s recommendation in its Nov. 18 letter of comment to delay imposition of requirements beyond Jan. 10, 2022, to allow more time for the public to comment and for the IRS to review those comments. The American Bar Association Section of Taxation submitted a similar letter.

The FAQ (# 2) states that the new requirements will apply to stamped refund claims as of January 10, 2022. The IRS set this date when it first announced the new requirements in October 2021.

At its fall meeting in November, members of the AICPA’s IRS Advocacy and Relations Committee told Holly Paz, deputy commissioner of the Large Business and International division of the IRS ( LB&I), that they were disappointed that this requirement was not originally proposed as a regulation, which allowed for formal deliberations and contributions.

Paz then said the IRS would invite comments through a dedicated email inbox, included in the FAQ. FAQ # 1 gives the email address [email protected] and states that the Service will monitor and review comments received during a one-year transition period announced earlier.

Practitioners have expressed continued concern about the requirements and how the Service implements them.

“The IRS appears to have processes in place to make these procedures permanent,” said Rochelle Hodes, JD, LL.M, director, Washington National Tax, Crowe LLP, and vice chair of the AICPA committee that heard from Paz. “However, taxpayers and practitioners remain concerned that these procedures are too expensive and cumbersome.”

Hodes said she also anticipated administrative difficulties and controversy with taxpayers leading to litigation.

“These procedural challenges will divert the IRS’s R&D expertise and resources away from other compliance and enforcement activities and will not advance efforts to reduce complexity in R&D,” he said. she declared.

In an apparent change from previous IRS statements, FAQ # 8, in answering what it means to “perfect” a claim, states that taxpayers will be notified by letter of information gaps, to which they are entitled. can remedy by providing the information within 45 days of being notified, 15 days longer than what the IRS had previously said. FAQ # 7 states that this notification will be made by a letter 6426C or 6428, which will indicate what information is missing. This improvement bonus only applies during the one-year transitional period. However, FAQ # 4 states that if the IRS does not receive the additional information or if it is still considered insufficient, the Service will reject the entire refund request.

The FAQs also address another concern expressed by the committee, the timeframe within which the IRS processes the submission. FAQ # 5 states that the IRS will process a claim “as quickly as possible” and make decisions within six months of receiving it. It was not immediately clear whether this was the initial review of the documentation, a determination that includes the perfection of a claim, or a determination of the claim on the merits. Revisions to the IRM state that the initial determination of the sufficiency of information should generally be made within 30 days of receipt.

FAQs 10 and 11 provide tips on identifying people who have carried out research. Applicants can identify these individuals by listing their title or position rather than their first and last name, but taxpayers “may be asked to provide specific names upon further review of the application.” A group of individuals who have conducted research together and sought to uncover the same information for the same business component can be listed together by name or title / position.

The internal memo provides procedural guidance for Field Prosecutor Council 20214101F, which initially outlined the requirements in October and provides three revisions to the IRM. The note notes that the purpose of the documentation requirements is to initially determine the validity of an R&D reimbursement credit claim before considering the claim on the merits.

A revision of Section 4.46.3 of the IRM describes in more detail each of the information elements, what they should contain and, in some cases, how the information may be presented by the taxpayer. For example, the description of research activities by business component should include “what the taxpayer did and how he did it”, for each component. However, the description need not encompass “in detail” the four part test of Sec. 41 (d) (1).

The revision also clarifies that the business components to be identified are those which form the factual basis of the claim and are defined under Sec. 41 (d) (2) (B). The identity of the people who performed each research activity, by business component, and the information each individual sought to discover, by business component, can be presented in a list, table or story. The IRM revision also specifies that in order for Form 6765 to meet the requirement to provide the total qualified expenses of employee salaries, procurement expenses, and contract research, the form (or its equivalent) must be “correctly completed”.

Another new IRM provision states that during the one-year transition period, a claim that would otherwise be considered timely under Sec. 6511 (a) but which does not meet the documentation requirements will be considered timely if finalized within the authorized 45 days. However, after January 9, 2023, no perfection period will be allowed, the IRM says.

– To comment on this article or suggest an idea for another article, contact Paul Bonner at [email protected].

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