Federal Tax Alert: Valid R&D Tax Credit Claims for Refunds Must Now Include 5 Essential Pieces of Contemporaneous Documentation

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On Monday, January 3rd of 2022 the Internal Revenue Service (hereinafter the “Service”) issued interim administrative authority in connection to R&D Tax Credit claims for refund. As set forth pursuant to this memorandum, effective January 10th of 2022 taxpayers filing a valid R&D Tax Credit claim for refund under I.R.C. § 41 must provide, at a minimum, five essential pieces of contemporaneous documentation including:

  • Identify all the business components that form the factual basis of the R&D tax credit claim for the claim year (i.e., Business Components as statutorily defined under I.R.C. § 41(d)(2)(B) must be identified);
  • All research activities performed by business component (i.e., this must include a description of what the taxpayer did, and how they did it, by business component. It does not need to describe the four-part test under IRC § 41(d)(1) in detail. Language that simply restates the requirements under the Code or Treasury Regulations is insufficient);
  • All individuals who performed each research activity by business component. (i.e., this can be a list, table, or narrative but must include the first and last name, and the title/position of the person or persons engaged in the R&D by business component);
  • All the information each individual sought to discover by business component. (i.e., this can be a list, table, or narrative providing the information each individual sought to discover); and
  • The total qualified expenses of employee wage expenses, supply expenses, and contract research expenses. The claim should provide the total amount of each of these expense categories. If the Form 6765 is properly completed, that will satisfy this requirement.

In addition to the aforementioned five criteria, a declaration signed under the penalties of perjury verifying that the facts and circumstances provided are accurate is now required. In most cases, the signature on Forms 1040X or 1120X serves this function.

The Service has also implemented a “transition period and time to perfect” provision which outlines:

  • For R&D Tax Credit claims filed between January 10, 2022 through January 9, 2023 (i.e., the transition period) taxpayers will be given 45 days to perfect the claim that is timely filed but does not provide the five foundational criteria as set forth under IRM 4.46.3.7.x;
  • Regarding timeliness, I.R.C. § 6511(a) provides the general rule that a R&D Tax Credit claim must be filed within 3 years from the time the tax return was filed or 2 years from the time the tax was paid, whichever is later. IRM 25.6.1.6.15 provides administrative guidance on when a document is treated as filed under the Internal Revenue Code;
  • During the transition period, a R&D Tax Credit claim that would otherwise be considered timely pursuant to I.R.C. § 6511(a) but does not meet the requirements of IRM 4.46.3.7.x, will be considered timely filed if perfected within the 45-day timeframe. Taxpayers that fail to provide the required information as listed in IRM 4.46.3.7.x will be notified with Letter 6428, Claim for Credit for Increasing Research Credit Activities - Additional Information Required. The 45-day perfect period will start from the date Letter 6428 is issued. All refund claims that include a R&D Tax Credit claim filed on or after January 10, 2023, will be subject to the general rules of I.R.C. § 6511(a); and
  • Subsequent submissions of facts and circumstances to perfect a claim must be accompanied by another written declaration regarding the accuracy of the information provided and signed under the penalties of perjury.

To review the scope and application of this newly issued administrative authority in its entirety please reference https://www.irs.gov/pub/foia/ig/lbi-04-0122-0001.pdf

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 highly distinguished Big Four Alumni Tax Practice Leader with approximately thirty years of progressive public accounting firm experience developing, managing, and leading multi-million-dollar tax advisory practices on a regional, national, and global level.

Mr. Scalise is also a prominent philanthropist who champions many charities nationwide in connection to 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 National 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. Mr. Scalise is the former NYC Manhattan Event Chairman and Sponsorship Chairman for the Alzheimer’s Association’s annual signature fundraising event entitled “The WALK to END ALZ” at the historic South Street Seaport District.

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