TAX ALERT |
Authored by RSM US LLP
The Internal Revenue Service (IRS) released a memorandum (LB&I-04-0122-0001) and FAQs that provide procedural guidance for applying Field Advice 20214101F regarding R&D credit refund claims on amended tax returns filed on or after Jan. 10, 2022.
A few key points to note are:
- The Field Advice effective date remains Jan. 10, 2022.
- After Jan. 10, there is a one-year transition period allowing taxpayers 45 days (instead of the previously stated 30 days) to ‘perfect’ a claim that does not provide the five items of information listed below.
- Even if a refund claim includes both an R&D credit claim and other claims, the IRS asserts that it can reject the entire claim if the five items of information are not provided within the 45-day period.
- Taxpayers utilizing statistical sampling to compute the R&D credit must provide with the claim for refund the first four items of information for all units in the sample along with total qualified wages, supplies and contract research for the claim year. Thus, statistical sampling still stands as a valid technique for an R&D credit study.
In October 2021, the Field Advice stated the IRS’s view as to the information needed to satisfy the specificity requirement for an R&D credit refund claim under Reg. sections 301.6402-2(b), which was covered in a previous tax alert. The IRS states that taxpayers are required to identify the following information at the time the refund claim is filed with the IRS:
- Identification of all business components to which the section 41 research credit claim relates for the claim year
- All research activities performed by business component
- All individuals who performed each research activity by business component
- All the information each individual sought to discover by business component
- Total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year
Transition period and time to perfect
Claims filed during the transition period (Jan. 10, 2022 through Jan. 9, 2023) that do not include the five items of information will be given 45 days to perfect an R&D claim for refund prior to the IRS’ final determination on the claim. Taxpayers that fail to provide the required information with their claim will be notified with Letter 6428 (Claim for Credit for Increasing Research Activities – Additional Information Required). The 45-day period starts from the date Letter 6428 is issued. If sufficient information is not provided during the 45-day period, the claim will be considered deficient and taxpayers will be issued Letter 6430 (No Consideration, Section 41 Claim).
Claims filed after the transition period ends
Claims filed on or after Jan. 10, 2023 that do not include the five items of information do not have the opportunity to perfect.
The full memorandum contains more detail regarding deficiency and claims coordinator procedures. The revisions include IRM 4.1.1, IRM 4.10.11 and IRM 4.46.3.
According to the FAQs, taxpayers utilizing a statistical sample to compute the credit are still required to provide the first four items of information for each unit of the sample along with total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year. Additionally, the FAQ noted that the entire claim for refund will be rejected if the IRS does not receive any missing information within the 45-day period, even if the refund claim contains other items in addition to R&D credits.
This article was written by Rory Bertiglia, Tony Coughlan, George Lee and originally appeared on 2022-02-01.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Chortek is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how the Chortek can assist you, please call us at contact us.