Filing an R&D Tax Credit Claim on an Amended Return Just got More Complex

What CPAs need to know about the new IRS Mandate

This article originally appeared in print in the SCACPAs Summer 2022 Edition of the South Carolina CPA Report.

For over 40 years, the federal Research and Development (R&D) tax credit has served as a valuable tax savings tool for thousands of innovative U.S. businesses. But despite being around for decades, it’s common for eligible taxpayers to overlook it – often being brought aware of it for the first time only after a switch in CPA firms or through casual discussions with other business owners.

Luckily, businesses that find themselves in this situation still have an opportunity to recoup at least some of the overlooked savings by filing R&D credit claims on amended tax returns. (For most eligible taxpayers, the statute of limitations to submit amended R&D credit claims is 3-years.) Unfortunately, due to a new IRS mandate, the process needed to claim these credits retroactively has just gotten a lot more complicated.

In October 2021, the IRS set forth a memorandum outlining new information that taxpayers are required to provide in order to amend tax returns claiming the R&D credit. The purported goal of this new administrative change is to allow the IRS to better determine upfront if an R&D tax credit claim should be paid immediately or undergo further examination.

Prior to the issuance of the memorandum, taxpayers could solely rely upon the specificity requirements of Treas. Reg. Section 301.6402-2 in preparing the refund claim. This regulation required that, “The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.”^[1] In the context of research credit claims, recent court rulings have held that this requirement is met where the taxpayer states that the basis of the amended return is to claim IRC Section 41 tax credits, and the amended return includes the related IRS Form 6765. Thus, taxpayers have historically had to submit nothing more than the amended return with a brief explanation on the intentions for the claims, along with the Form 6765.

In comparison, the new process for amending the tax return will now require the taxpayer to submit an amended return, a Form 6765, and will also require the taxpayer to provide a signed statement specifying the following five items of information:

1. The identification of all business components for which the credit is being claimed on;
2. The identification of the research activities for each business component;
3. The names of the individuals who are performing the research activities;
4. The information that each of individuals sought to discover during R&D activities;
5. All qualified employee wage expenses, supply expenses and contract research expenses for the applicable year (this may be done using a Form 6765.)

It should be noted that the IRS is not requiring taxpayers to provide underlying supporting documentation with the claim, or to attach a prepared R&D tax credit study to the claim. Only a signed declaration attesting to the accuracy of the facts contained within the statement is required.

Under the new memorandum, the IRS provided taxpayers a “grace period” of up until January 2022 to adopt this new amended return process. Now that this grace period has expired, the IRS has moved toward a one-year transition period in which taxpayers will now have 45 days to perfect an amended return claim that the Agency has deemed to be deficient. In this scenario, the IRS will mail the taxpayer a Letter 6426C or Letter 6428. The letter will indicate which of the five items of information are missing and will provide a fax number for which the taxpayer can send the missing or deficient information. (Communication by fax is still the preferred way of the IRS, but taxpayers may also provide the information via mail as long as the response includes the requested information as well as a copy of the original IRS notification letter.)

Because the goal of this administrative change is efficiency, IRS notices have stated that the Agency will attempt to process these claims within 6 months of receipt. Ultimately, if a refund claim is disallowed due to timeliness, the taxpayer may be eligible for consideration by Appeals, but if the disallowance is due to deficiency, appeals is not available.

CONCLUSION

Though the intention of this new amended return process is to drive efficiencies for the IRS, and likely to reduce future audits, it also creates additional burdens on the taxpayer including the short turnaround time required to perfect any deficiencies. Unfortunately, this upfront burden may dissuade some taxpayers from filing for amended R&D credits altogether. Other first-time R&D credit filers are likely to turn to outside professional services firms to assist them with conducting a formal R&D tax credit study, so as to properly identify and submit the necessary information to the IRS. The IRS is likely to face opposition to these changes and potential challenges to them in the future. The IRS has stated that it will monitor this new process closely and is open to taxpayer feedback regarding these new requirements through their email: [email protected].

[1] 32 FR 15241, Nov. 3, 1967, as amended by T.D. 7008, 34 FR 3673, Mar. 1, 1969; T.D. 7188, 37 FR 12794, June 29, 1972; T.D. 7410, 41 FR 11020, Mar. 16, 1976; T.D. ATF-33, 41 FR 44038, Oct. 6, 1976; T.D. 7484, 42 FR 22143, May 2, 1977.