IRS updates FAQs for R&D tax credit refund claims

The Internal Revenue Service issued new guidance Wednesday for taxpayers and tax practitioners submitting claims for refunds involving the research credit.

Last year, the IRS Office of Chief Counsel issued a memorandum imposing new requirements for backing up claims for tax refunds for research and development tax credits (see story). In an effort to discourage companies from submitting dubious claims for tax breaks for R&D work they never carried out, the IRS is asking for more detailed information about all the business components for which the research credit claims relate for that year, and for each business component, companies will need to identify all the research activities they’ve performed and name the individuals who performed each research activity, along with the information each individual sought to discover.

The new documentation requirements provoked a backlash from many tax professionals and clients, along with requests for more clarification (see story). Last month, the IRS extended the deadline for “perfecting” the refund claims, expanding the transition period from 30 to 45 days to provide more evidence to back up tax refund claims involving the research credit, while also issuing new guidance (see story).

For claims that include a research credit claim filed during the the transition period from Jan. 10, 2022 through Jan. 9, 2023, taxpayers were 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.

Stefani Reynolds/Bloomberg

On Wednesday, the IRS updated the FAQ page with answers to questions that the agency has been getting from taxpayers and tax pros.

In answer to the question of how taxpayers who file a refund claim that includes the research credit comply with the requirement to provide the five items of information when the claim is based on an R&D credit from a pass-through entity, the IRS first discussed how a pass-through entity like the type of large partnership that the IRS is able to audit under the centralized audit procedures provided by the Bipartisan Budget Agreement of 2015 can deal with the requirements.

“If a claim for refund that includes the Research Credit is based on a Research Credit from a BBA partnership, the BBA partnership does not file an amended return,” said the IRS. “Instead, the BBA partnership must file an administrative adjustment request (AAR) and attach the five items of information to that AAR. As part of the AAR process, the BBA partnership will also submit Forms 8985 and 8986 to the IRS and send Forms 8986 to its partners. The BBA partnership is not required to provide the five items of information again on the Forms 8985 and Forms 8986. The BBA partners do not need to attach the five items of information to their original returns to which their Forms 8986 are attached.”

If a refund that includes the research credit comes from a non-BBA pass-through entity, such as a TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) partnership, S corporation or other non-TEFRA or non-BBA partnership, it can include the five items of information with its amended return. Partners or shareholders are still required to include the five items of information with their amended tax return claiming the research credit. They should receive the five items of information from the partnership or S corporation in which they are a partner or shareholder, for example, in the form of an amended Schedule K-1, and any statements attached to it.

Another question is whether taxpayers who e-file their amended tax return claiming a refund involving the research credit are required to provide the five items of information with their e-filed amended tax return?

The IRS said they do, with the proviso that pass-through entity taxpayers (and their partners or shareholders) who e-file their amended tax returns should follow the requirements for providing the five items of information as stated in the prior answer.

Finally, another new addition to the FAQ page asks, “If the IRS determines that a claim for refund involving the Research Credit is not valid, may a taxpayer challenge the determination before the IRS Independent Office of Appeals?”

The answer is that under existing IRS procedures, refund claims that are disallowed on the basis of a timeliness determination are eligible for consideration by the Appeals office. “However, the Appeals resolution process is not available for refund claims that are rejected on the basis that they are deficient or otherwise not processible,” the IRS added.

The IRS also noted that it implemented a one-year transition period during which taxpayers who file a claim for refund involving the research credit will be informed of a deficient claim for refund through Letter 6426C or 6428. The letter will indicate which of the five items of information is missing and give the taxpayers 45 days to perfect the filing. The IRS is continuing to accept input and plans to closely monitor the process and questions during the one-year transition period to see if any modifications are necessary. Comments can be sent to irs.feedback.recredit.claims@irs.gov.