One year extension of research credit transition period

TAX ALERT | October 05, 2022

Authored by RSM US LLP

Executive summary

The IRS requires significant documentation in research credit refund claims.  There is a transition period whereby the IRS will give taxpayers 45 days to comply if the IRS deems that the taxpayer has not complied with this documentation requirements.  The IRS just extended the duration of this transition period until Jan. 10, 2024.

The IRS announced Friday, Sept. 30 that they would extend for 12 months the transition period regarding their interpretation and enforcement of the specificity requirement for refund claims involving the research credit. The transition period, during which taxpayers are provided 45 days to supplement research credit refund claims that the IRS deems incomplete, now runs until Jan. 10, 2024.

The Office of Chief Counsel issued a memorandum to the IRS field offices on Oct. 15, 2021 outlining the requirements of a valid refund claim involving the research credit.  The field attorney advice (FAA) cites Reg. section 301.6402-2(b)(1) as its authority.  See FAA 20214101F.  This regulation denies a court jurisdiction over a refund claim if the taxpayer did not first comply with the requirements of this regulation – these requirements boil down to giving the IRS sufficient detail to consider the refund claim.  

The five items of information are:

1. Identify all the business components to which the.  section 41 research credit claim relates for that year.
2. For each business component:
   1.  identify all research activities performed;
   2. identify all individuals who performed each research activity; and
   3. identify all the information each individual sought to discover.
3. Provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year (this may be done using Form 6765, Credit for Increasing Research Activities).

The FAA announced that these new requirements would begin for refund claims made on or after Jan. 10, 2022.  However, for the 12 months until Jan. 9, 2023, taxpayers would have an opportunity to perfect claims that did not meet the requirements.  That is, if a taxpayer did not provide sufficient specificity as to its research credit refund claim, the IRS would let the taxpayer know, during this 12-month specificity period, and give the taxpayer 45 days to perfect the refund claim.  However, the IRS’s position was that, effective Jan. 10, 2023, taxpayers would no longer have a 45-day grace period to perfect the claim.  

However, the announcement this past Friday means that the transition period – allowing taxpayers 45 days to perfect invalid refund claims – will continue through Jan. 9, 2024.  Although this is a taxpayer-favorable announcement, serious taxpayer concerns remain over the volume of information the IRS attempts to require for research credit refund claims.