Additional Guidance Released by the IRS on R&D Tax Credit Claims

In October 2021, the Internal Revenue Service released Chief Counsel Advice Memorandum 20214101F, which provided guidelines for additional information taxpayers need to submit a §41 Research Credit refund. The memo outlined specific requirements, but left taxpayers and tax preparers waiting for clarification on certain issues.

On January 3, 2022, the IRS issued temporary guidance to assist taxpayers with complying with the memo. This new information provides clarification on the R&D Credit refund claims process as well as information required to be included. For an R&D Credit claim to be valid, taxpayers must submit a list of business components that are being claimed for the year; identify all research activities performed during the development of each business component; name the individuals who performed the activities and the information they sought to discover; and provide the total qualified wage, supplies, and contract research expenses for the claim year.

Enforcement for these requirements begins on January 10, 2022, which begins a one-year transition period where taxpayers will have 45 days to perfect their claim if the IRS determines that any of the information is missing or insufficient. This is an increase from the 30 days described in the IRS news release from October 2021. Any timely filed claims that are determined to be insufficient after the statute date will still be considered timely if perfected during this 45 day period. The IRS indicates that all returns will be checked for this information and may take up to 6 months from receipt to process.

Further, the IRS provided additional guidance on the submission requirements. Taxpayers may group together employees who sought to discover the same information for a business component and describe what they collectively sought to discover. Taxpayers can opt to identify employees by title or position rather than specific names, although the taxpayer may be asked to provide names upon substantive review of the claim. Taxpayers who used statistical sampling to determine their Research Credit in accordance with Revenue Procedure 2011-42 will only need to provide information related to the projects contained in the sample.

As the guidance for the R&D Credit evolves, it is important to have an experienced and trusted partner on your team. For more information on this update and other areas of specialty tax, watch our State of Specialty Tax webinar here.