The Internal Revenue Service expanded the transition period from 30 to 45 days to provide evidence to back up tax refund claims involving the research and development credit, while issuing new guidance.
The IRS updated on Wednesday an announcement it made back in October about the information it will now require for a valid research credit refund claim (see story). To make sure the claims are valid, the IRS wants taxpayers to identify all the business components to which the research credit claim relates for that year, and for each business component, they have to identify all research activities performed, name the individuals who performed each research activity, along with the information each individual tried to discover, as well as provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. The IRS is providing a grace period (until Jan. 10, 2022) before requiring the inclusion of this information with research credit claims for tax refunds. Once the grace period is over, there will be a one-year transition period during which taxpayers will now have 45 days to “perfect” a research credit claim for refund prior to the IRS' final determination on the claim. Originally, they were only given 30 days to perfect the claim.
“The term ‘perfecting’ means taxpayers are given an opportunity to provide missing information that is required to process the Research Credit refund claim,” the IRS explained in a newly updated FAQ page. “During the transition period, taxpayers will be notified of a deficient claim and provided 45 days to perfect. This date by which a taxpayer must provide the missing information will be on the letter sent to taxpayers.”
IRS headquarters in Washington, D.C.
Natalia Bratslavsky/Adobe
The IRS also issued interim guidance Monday to its tax examiners on the procedures they should follow for determining whether a claim is valid. For claims that include a research credit claim filed during the the transition period from Jan. 10, 2022 through Jan. 9, 2023, taxpayers will be given 45 days to perfect the claim that is filed on a timely basis but does not provide the five essential pieces of information: identifying all the business components that form the factual basis of the research credit claim for the claim year; all the research activities performed by each business component; all individuals who performed each research activity by business component; all the information each individual sought to discover by business component; and the total qualified employee wage expenses, supply expenses, and contract research expenses.
“In addition to the five criteria listed above, a declaration signed under the penalties of perjury verifying that the facts provided are accurate is required,” said the IRS. “In most cases, the signature on Forms 1040X or 1120X serves this function.”
The IRS has been beefing up the requirements for validating R&D credit refund claims ever since the agency issued a memorandum last September from its Office of Chief Counsel saying it wants more information about each business component. The IRS has sometimes listed improper claims for the R&D tax credit among its Dirty Dozen tax scams, and the guidance appears to be an effort to crack down on bogus claims. However, the new requirements have also provoked an outcry among many tax professionals and taxpayers who have legitimate tax credits and tax refunds to claim for research their companies have performed (see story).
“The credit has been around for 40 years, and the intent of that credit was to incentivize R&D jobs to stay in the United States and to stay competitive globally in this space,” Shelby Ford, leader of the R&D tax credit practice at Crowe LLP, told Accounting Today in November. “The scrutiny under exam that already exists today before the [Chief Counsel Advice] can be really intimidating for taxpayers of all sizes to comply with the documentation requirements. The IRS is challenged with understanding what documentation does this taxpayer have available to support why they qualify. They’re asking for the information to be canned in a certain way, and this one-size-fits-all approach could be really frustrating for a taxpayer to say what documentation do I have and how do I put it in this format.”
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