IRS doubles down on R&D credit refund claim specificity requirement

The IRS has updated its FAQs on the issue of research credit refund claims. These updates address how the new requirements will be applied in the context of pass-through entities and also concern a taxpayer’s right to appeal to the IRS Office of Appeals.

Background

The IRS released guidance on Oct. 15, 2021 with the IRS’s interpretation of the specificity requirement of Reg. section 1.6402-2(b)(1), which was covered in a previous tax alert. This guidance stated that effective Jan. 10, 2022, research credit refund claims (whether via an original return or an amended return) must provide much greater specificity as to the research credit claim than many taxpayers had previously provided. The IRS stated that taxpayers must provide the following information:

• All the business components that form the factual basis for the section 41 research credit claim for the claim year
• All research activities performed by business components
• All individuals who performed each research activity by business component
• All the information each individual sought to discover by business component
• The total qualified employee wage expenses, supply expenses and contract research expenses

Many taxpayer representative groups had asked the IRS, at a minimum, to postpone the effective date to a date later than the Jan. 10, 2022 effective date. However, in FAQs and a memo dated Jan. 3, 2022, the IRS confirmed that the Jan. 10 effective date still held, and the details can also be found in a previous tax alert.

Feb. 8 guidance

With these updated FAQs, the IRS has announced the following:

• BBA partnerships: BBA partnerships do not file an amended return, but rather file an Administrative Adjustment Request (AAR), with the five items of information. The BBA partners, however, do not need to provide the five items of information with their amended tax return with the attached Form 8896.
• Non-BBA pass-throughs: TEFRA partnerships, S corporations and other non-BBA pass-throughs, however, ‘may’ include the five items of information with their amended return. The partners or S corporation shareholders, however, “are required to include the five items of information with their amended tax return claiming the Research Credit.” Query if there could be sensitivities involved with an S corporation, say, sharing information with the shareholders about the work various individual employees were doing and what their wages were.

Appeals: According to the FAQ update, “the Appeals resolution process is not available for refund claims that are rejected on the basis that they are deficient.” In this case the IRS will issue a no consideration letter. No consideration letters will not be appealable to the IRS Independent Office of Appeals. The taxpayers will also not be able to bring a refund suit in the appropriate district court or federal court of claims.

Conclusion

The IRS states that they will continue to monitor the process and questions and see if adjustments to their guidance is necessary. In the meanwhile, taxpayers would be well advised to take note of the new research credit landscape and consider making their research credit claims on original returns.