Posted by Robert Bryant, Esq., CPA on 10.20.21
The Internal Revenue Service (IRS) has issued new filing requirements for any taxpayer filing an IRC Section 41 R & D tax credit claim. While the R & D tax credit and IRC Section 41 has been available for decades this is the first time in quite a while where the Service is asking for specific and detailed information like this, on the actual tax filing. The Service’s overall goal is to reduce the large number of audits on the R & D claims and instead, determine upfront if such a claim should be accepted or whether further review is required before approval.
The Service released Chief Counsel Memorandum 2021410F which set forth what information taxpayers must include for research credit refund claims. Per IRS News Release 2021-203, citing the Chief Counsel’s memo, in order for a R & D tax credit claim to be considered valid, the taxpayer must include:
- A list of all business components that relate to the claim
- plus for each identified business component
- describe all research activities performed
- the names of all individuals who performed the qualifying activities
- as well as information each individual sought to discover
- qualifying costs must include
- employee wages claimed
- qualifying supply costs claimed
- qualifying contract research costs claimed
- a declaration signed by the taxpayer under the penalties of perjury
- verifying the facts provided are accurate
While this sounds like a mountain of documentation to provide for something as straightforward as a tax credit, the reality is all solid, well-established R & D tax credit claims would by definition, already have all this information. The only real nuance to this directive is that the Service is now asking for this information to accompany the tax credit filing, in a proactive manner. And too, much of these requirements are already found on Form 6765, as well as the fact that the taxpayer signing their individual or corporate/partnership tax returns serves as their declaration that the facts provided are accurate.
What’s interesting is that many states who allow for R&D tax credit claims likewise require a great deal of supporting documentation to accompany a state claim. Pennsylvania for instance, has a terrific state credit and has evolved its filing from a paper form, to an application, to now an online application process that requires multiple items of supporting documentation. Connecticut among other states, follows this line of thought as well. Here it can be argued that IRS is simply trying to keep up with some of the more involved state filings.
While the IRS promises to provide further details related to this new filing requirement, it is important to note that the grace period for this filing requirement is January 10, 2022. Meaning, this requirement goes into effect January 11, and all research claims filed after that date must adhere to these new filing requirements.
Once the grace period expires, there is a one-year transition period when the taxpayer has 30 days to perfect their R & D tax credit claim before the IRS makes a final determination on the claim.
Please contact Tax Point Advisors for any assistance with this new IRS requirement or any other questions you may have about any tax credit claims.
