IRS Updates FAQ for R&D Tax Credit Refund Claims

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The Internal Revenue Service on Wednesday issued new guidelines for taxpayers and tax practitioners submitting refund claims involving the search credit.

Last year, the IRS Office of Legal Counsel released a memorandum imposing new requirements to substantiate tax refund claims for research and development tax credits (see the story). In an effort to discourage companies from submitting questionable claims for tax breaks for R&D work they never performed, the IRS is asking for more detailed information on all business components to which research credit claims relate for this year, and for each commercial component. , companies will need to identify all research activities they have performed and name the individuals who performed each research activity, as well as the information each individual sought to discover.

The new documentation requirements have provoked a strong reaction from many tax professionals and clients, as well as requests for clarification (see the story). Last month, the IRS extended the deadline for “perfecting” refund claims, extending the transition period from 30 to 45 days to provide more evidence to support tax refund claims involving the tax credit. research, while issuing new guidelines (see the story).

For applications that include a research credit application filed during the transition period from January 10, 2022 to January 9, 2023, taxpayers have had 45 days to perfect the application which is filed in a timely manner but does not provide the five essential elements . Data Elements: identifying all commercial components that form the factual basis of the research credit application for the application year; all the research activities carried out by each business component; all individuals who performed each research activity by business component; all the information that each individual sought to discover by business component; and the total of qualified employee salary expenditures, procurement expenditures and contract research expenditures.

IRS Headquarters in Washington, D.C.

Stefani Reynolds/Bloomberg

On Wednesday, the IRS updated the FAQs with answers to questions the agency has received from taxpayers and tax professionals.

In response to the question of how taxpayers filing a refund claim that includes the research credit comply with the requirement to provide all five pieces of information when the claim is based on an R&D credit from a flow-through entity , the IRS first explained how a flow-through entity like the type of large partnership that the IRS is able to audit under the centralized auditing procedures provided for in the 2015 bipartisan budget agreement can meet the requirements.

“If a claim for reimbursement that includes research credit is based on research credit from a BBA partnership, the BBA partnership does not file an amended return,” the IRS said. “Instead, the BBA partnership must file an Administrative Adjustment Request (AAR) and attach the five pieces 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 pieces of information again on Forms 8985 and 8986. BBA partners do not need to attach the five pieces of information to their original returns to which their forms 8986 are attached.

If a refund that includes the research credit is from a non-BBA flow-through entity, such as a Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) partnership, S corporation, or other non-TEFRA or non-BBA partnership, it may attach the five pieces of information to his amended return. Partners or shareholders are still required to include the five pieces of information in their amended tax declaration for the research credit application. They must receive the five pieces of information from the partnership or S corporation in which they are partners or shareholders, for example, in the form of an amended Schedule K-1, and all statements attached thereto .

Another question is whether taxpayers who electronically submit their amended tax return requesting a refund involving research credit are required to provide the five pieces of information with their amended online tax return?

The IRS has said yes, provided that FTE taxpayers (and their partners or shareholders) who electronically file their amended tax returns must meet the requirements for providing the five pieces of information listed in the previous response .

Finally, another new addition to the FAQ page asks: “If the IRS determines that a refund claim involving the search credit is not valid, can a taxpayer appeal the decision to the Independent Office of Appeals of the IRS?”

The answer is that under existing IRS procedures, refund requests that are denied based on a timeliness determination are eligible for review by the appeals office. “However, the appeals resolution process is not available for refund requests that are denied on the basis that they are deficient or otherwise unworkable,” the IRS added.

The IRS also noted that it has implemented a one-year transition period during which taxpayers filing a refund request involving the search credit will be notified of a deficient refund request through of letter 6426C or 6428. The letter will indicate which of the five pieces of information is missing and give taxpayers 45 days to complete the file. The IRS continues to welcome feedback and plans to closely monitor the process and issues during the one-year transition period to see if any changes are needed. Comments can be sent to [email protected].

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