In a reverse move after months of questions, the IRS has extended the transition period for revised R&D credit refund applications. New information and reporting requirements took effect after January 10, 2022, but taxpayers had until 2023 to make changes if the application was incorrect or incomplete. Once the deadline passed, any irregularities with a federal R&D application would result in an immediate rejection. Due to input from several sources, including the American Institute of Certified Public Accountants (ACIPA), the regulations have been changed. The transition period will last through January 4, 2024, granting applicants additional time to comply with the new requirements. To help clients, prospects, and others, Calvetti Ferguson has provided a summary of the key details below.
In 2021, the IRS issued new guidance for taxpayers claiming the R&D credit, also known as the Sec. 41 credit. The IRS’s reasoning pointed out that R&D refund claims had to be reviewed manually – a time-intensive task for an understaffed agency during the pandemic. “Each year, the IRS receives thousands of R&E claims for credits in the hundreds of millions of dollars from corporations, businesses, and individual taxpayers.” From the taxpayer’s perspective, claims often take months to process. Requiring more information upfront was intended to speed up the review process.
The IRS later clarified that the new requirements are for amended returns only.
A three-month grace period gave taxpayers a short window to begin complying with the new requirements. So, the IRS granted a transition period where taxpayers would have time to correct mistakes and resubmit a “perfected” application. Initially, this window was 30 days; it was expanded to 45 days on January 5, 2022, and the transition period was extended to January 2023.
Once the transition period ends, any incorrect or incomplete R&D refund claims will be denied without the opportunity to appeal.
In a September 30 announcement, the IRS said it would extend the transition period a whole year to January 10, 2024. If the initial application contained mistakes, taxpayers still have 45 days to resubmit an R&D credit refund claim.
The change in course came after an AICPA letter, which offered recommendations on the new five points of information now required on amended R&D refund claims. In its letter, the AICPA expressed concern about significant taxpayer burden, unclear information requirements, and looking at the entirety of the credit versus individual items.
Specifically, the AICPA noted that large taxpayers might have to produce hundreds of pages of information to comply, while more upfront documentation requirements could deter smaller taxpayers. It also interpreted the requirements as too broad and asked for specific examples and formats to improve taxpayer understanding. And, since taxpayers have 45 days to correct invalid claims, the AICPA argued that the IRS should also aim to respond within 45 days.
New Information Reporting Requirements for Sec. 41 Refund Claims
The new requirement for more information with amended Sec. 41 refund claims is at the heart of the back and forth.
Although the original four-part test and documentation requirements remain in place, taxpayers must now go into greater depth and detail on eligible research expenses. The five required items that must be separated are the business components, research activities, individuals under each business component, the information they attempted to find, and all qualified wages and related expenses.
A business component is “any product, process, computer software, technique, formula, or invention which is to be held for sale, lease, or license, or used by the taxpayer in a trade or business.” It’s up to the business to decide how to present the information.
Individuals don’t need to be named – title or position is enough – though the total number of people is required. Taxpayers should keep records of employee names related to research activities in case the IRS requests more detail. Wage information will need to be separated according to employee and contractor expenses. All information should be submitted along with Form 6765.
This new information is still required even if the taxpayer submits a statistical sampling.
R&D credit refund claims postmarked before January 10, 2022, did not need to include the new information. As of now, new R&D credit refund claims made in the same tax year as expenses were incurred do not need to submit the extra information.
This change is good news for Texas companies planning to claim the federal R&D tax credit in the coming months. The additional time will make correcting errors when filing amended returns easier. If you have questions about the information outlined above or need assistance claiming the R&D credit, Calvetti Ferguson can help. For additional information, please fill out the form below.