R&D refund claims, which typically apply to amended returns, trigger audits, according to a recent IRS memo to field office. Know what you are risking before filing an amended R&D refund claim.
By Mark Dunning, Partner, TaxOps Minimization
On October 15, 2021, the Office of the Chief Counsel issued CCM2021410F (CCM). Sent to the IRS field offices on September 17, 2021, the CCM describes how refund claims for I.R.C. § 41 research credit (R&D) credits must be filed. The CCM addresses necessary documentation, formatting, and any statute of limitations required to be included with timely filed research credit refund claims, and it is ugly for taxpayers.
These refund claims typically apply to amended returns. The 22-page document is written to nail folks who are aggressive with their R&D refund claims. New refund claims are spared from these restrictive rules until January 10, 2022, after which there will be a one-year transition period wherein taxpayers will have 30 days to perfect a research credit claim for refund prior to the IRS’ final determination on the claim. The IRS press release related to the CCM states that further details will be forthcoming; however, the IRS may begin requiring this detailed information.
Companies trying to get money back based on previous year filings will find the process to be painful. Specifically, the CCM provides that for a research credit claim for refund to be considered a valid claim, taxpayers are required to provide the following information at the time the refund claim is filed with the IRS:
- Identify all the business components to which the Section 41 research credit claim relates for that year.
- For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover. This is equivalent to a technical memo on how it meets all four R&D criteria for each project.
- 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
This information must be submitted when the refund claim is filed and be provided with a declaration signed under the penalties of perjury verifying that the facts provided are accurate. Otherwise, the CCM states that the refund claim should be rejected as deficient.
The amount of supporting information to provide is unclear. While supporting documentation with the claim is not required, a taxpayer may voluntarily provide documents with the claim as long as those documents respond to the fact requirements above and are presented in a written statement and incorporate by reference to documents attached to the claim.
The refund claim must be filed by a taxpayer within the period of limitations (I.R.C. § 6511), which is typically within three years of the date of the original tax return was filed or two years from the time the tax was paid—whichever period expires later.
It is a taxpayer’s choice to amend a return. Taxpayers who amend a return and request a research credit refund should expect to be audited and be prepared for that outcome when the return is filed. In your cost/benefit analysis, if you pursue a research credit refund through an amended return, make sure the risk of an audit is worth the research credit refund.
Questions about R&D credits? Let’s talk about how you can best maximize these lucrative research incentives.
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