The research and development (R&D) tax credit is submitted on federal form 6765 and compiles the amounts of Qualified Research Expenditures (QREs) and computes the total credit for the tax year. Taxpayers seeking to amend a prior year’s return to claim the R&D tax credit are now required to provide the IRS with additional documentation at the time of filing rather than waiting for IRS review.
Historically, the IRS only required that the company maintain data to support the claim upon examination (audit) for credits claimed on either a timely filed or amended return. The IRS has stated that reviewing claims is consuming substantial resources and released a memo in October 2021 with new guidelines. The new guidance, which does not currently apply to timely filed returns, is intended to diminish this burden on taxpayers and the agency. However, the effect is actually the opposite for taxpayers who now bear an additional reporting burden.
Information You Need To Provide
In addition to the traditional filing of the 6765 and maintaining documentation, taxpayers will need to provide the following five items of information when filing the claim for refund:
- (1) Identify all the business components to which the Section 41 research credit claim relates for that year.
- (2) For each business component, identify all research activities performed and (3) name the individuals who performed each research activity, (4) as well as the information each individual sought to discover.
- (5) Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.
This supporting information must be provided using a written statement, not just submitting a stack of documents. Claims that do not comply with the new guidance will be rejected.
What if a Claim Does Not Provide Sufficient Information?
As of October 30, 2023, the IRS has extended by another year the transition period through January 10, 2025 for taxpayers to adjust to the new requirements. During this period, taxpayers will be informed if their claim is “deficient” with a letter detailing what information is missing. Taxpayers will have 45 days to “perfect” their claim and provide the required information by mail or fax.
Rejection of a claim because of deficiency is not the same as a claim being disallowed based on the facts and circumstances of the claim. According to IRS audit guidelines published in late 2021, “deficient claims do not confer review jurisdiction on any court” meaning taxpayers may not be able to dispute this rejection.
Next Steps for Taxpayers
The landscape for claims for R&D Credit refunds has changed dramatically in the last several months. This enhanced documentation requirement may add significant administrative efforts for taxpayers and preparers. Even though the memorandum was released with no period for public commentary, practitioners and taxpayers will likely see additional publications from the IRS in the upcoming months and years.
If you plan to claim the research and development tax credit in the future, start documenting the five requirements in advance. The IRS has also provided answers to frequently asked questions, which are regularly updated.
We Can Help
Our team of research & development tax credit experts provide engineering-based tax credit studies customized to meet your needs. Visit our R&D tax credit services page to learn more, or get in touch now.