New Administrative Authority Issued Governing Requirements for Valid R&D Tax Credit Claims
On October 15, 2021 the Internal Revenue Service (hereinafter the “Service”) set forth additional requirements for taxpayers to include in order for a R&D tax credit claim for refund to be valid. It should be duly noted that while the statutory authority under I.R.C. § 41 and its corresponding treasury regulations already outline the required statutory and administrative authority to get to a tax return filing position under Circular 230, the Service decided additional administrative authority is warranted to improve the tax administration procedures with clearer instructions for eligible taxpayers and reduce the number of disputes over the R&D tax credit claims.
Successful tax administration entails ensuring taxpayers truly understand what is required to support the claim for the R&D tax credit. Each year, the Service receives tens of thousands of R&D tax credit claims for credits in the aggregate totaling hundreds of millions of dollars from business entities and individual taxpayers. The Service is currently examining a substantial number of R&D tax credit cases which consume considerable resources from both the Service and our judicial system as many disputes are settled in District Court or Tax Court.
The recently issued Chief Counsel Memorandum (hereinafter the “CCM”) is the result of ongoing efforts to manage R&D tax credit issues and resources in the most effective, efficient, and productive manner. By requiring taxpayers to proactively provide the information referenced below, the Service will be better able to determine upfront if an R&D tax credit claim for refund should be paid immediately or whether an examination should commence without delay.
In particular, the CCM provides for a R&D tax credit claim for refund to be considered a valid claim, taxpayers are now required to proactively provide the subsequent information at the time the refund claim is filed with the Service:
- Identify all the business components to which the R&D tax credit claim relates for that year;
- For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover; and
- Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. This must be completed using a newly revised IRS Form 6765 entitled “Credit for Increasing Research Activities” expected to be released in January of 2022.
The Service will provide an immediate grace period from October 15th of 2021 until January 10th of 2022 before requiring the inclusion of this information with timely filed R&D tax credit claims for refund. Upon the expiration of the aforementioned grace period, there will be a one-year transition period during which taxpayers will have 30 days to perfect an R&D tax credit claim for refund prior to the Service's final determination on the claim. Further administrative authority will be forthcoming from the Service including revised tax filing forms and instructions which are expected to be released in January of 2022.
To determine the scope and application of the newly issued CCM on your client base, consult https://www.irs.gov/pub/irs-lafa/20214101f.pdf
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About the Author
Peter J. Scalise serves as the federal tax credits and incentives practice leader for the Americas at Prager Metis CPAs, LLC, a member of the Prager Metis International Group. Mr. Scalise is a distinguished Big Four alumni tax practice leader with approximately 30 years of progressive accounting firm experience developing, managing, and leading multi-million-dollar tax advisory practices on a regional, national, and global level. He serves on both the board of directors and board of editors for the American Society of Tax Professionals and is the founding president and chairman of both the Northeastern Region Tax Roundtable and the Washington National Tax Roundtable, operating divisions of ASTP.
Mr. Scalise is also a philanthropist who champions many charities nationwide concerned with poverty and hunger alleviation; economic development; health and social services; veteran and military service personnel along with preserving arts and cultural programs. Mr. Scalise is currently serving on the Board of Directors for the Prager Metis Charitable Foundation Inc, a I.R.C. § 501(c)(3) organization and is the Founding Chairman of the Accounting Industry Leadership Council to benefit the Alzheimer’s Association.
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