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New Administrative Authority Issued Governing Requirements For Valid R&D Tax Credit Claims



New Administrative Authority Issued Governing Requirements For Valid R&D Tax Credit Claims

On October 15th, the Internal Revenue Service (hereinafter the “Service”) has set forth additional information that taxpayers will be required to include for a R&D tax credit claim for refund to be considered valid. It should be duly noted that while the statutory authority under I.R.C. § 41 and its corresponding treasury regulations already outline the required statutory and administrative authority to get to a tax return filing position under Circular 230 for a R&D Tax Credit refund claim to be valid, the Service decided that additional administrative authority is warranted to improve the tax administration procedures with clearer instructions for eligible taxpayers to claim the R&D tax credit while reducing the number of disputes over such claims.

Successful tax administration entails ensuring taxpayers truly understand what is required to support the claim for the R&D tax credit. Each year, the Service receives tens of thousands of R&D tax credit claims for credits in the aggregate totaling hundreds of millions of dollars from business entities and individual taxpayers. The Service is currently examining a substantial number of R&D tax credit cases which consume considerable resources from both the Service and our judicial system as many disputes are settled in District Court or Tax Court.

The recently issued Chief Counsel Memorandum (hereinafter the “CCM”) is the result of ongoing efforts to manage R&D tax credit issues and resources in the most effective, efficient, and productive manner. By requiring taxpayers to proactively provide the information referenced below, the Service will be better able to determine upfront if an R&D tax credit claim for refund should be paid immediately or whether an examination should commence without delay.

In particular, the CCM provides that for a R&D tax credit claim for refund to be considered a valid claim, taxpayers are now required to proactively provide the subsequent information at the time the refund claim is filed with the Service:

  • Identify all the business components to which the R&D tax 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; and
  • Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. This must be completed using a newly revised IRS Form 6765 entitled “Credit for Increasing Research Activities” expected to be released in January of 2022.

The Service will provide an immediate grace period from October 15th of 2021 until January 10th of 2022 before requiring the inclusion of this information with timely filed R&D tax credit claims for refund. Upon the expiration of the aforementioned grace period, there will be a one-year transition period during which taxpayers will have 30 days to perfect a R&D tax credit claim for refund prior to the Service’s final determination on the claim. Further administrative authority will be forthcoming from the Service including revised tax filing forms and instructions which are expected to be released to the public in January of 2022.

To determine the scope and application of the newly issued CCM on your client base, please consult https://www.irs.gov/pub/irs-lafa/20214101f.pdf

Practitioner comments can be sent directly to irs.feedback.recredit.claims@irs.gov

Have a question? Contact Peter J Scalise, Prager Metis.

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has approximately twenty years of progressive public accounting experience developing, managing and leading multi-million dollar tax advisory practices on both a regional and national level.

Peter is a highly acclaimed thought leader in the fields of accounting and taxation with deep subject matter expertise in connection to designing, implementing and defending sustainable methodologies for specialty tax incentives including, but not limited to, research tax incentives; orphan drug credits; therapeutic discovery credits; accounting methods and periods; energy tax incentives in connection to green building envelope efficiency and benchmarking, solar energy, bio energies, fuel cells, wind turbines, micro turbines, and geothermal systems; and comprehensive fixed asset analysis incorporating principles of construction tax planning, cost segregation analysis and the final treasury regulations governing tangible property.

Peter is a renowned keynote speaker and an extensively published author on specialty tax incentives, tax controversy matters, and legislative updates from Capitol Hill for NAREIT, AGRION, USGBC, AICPA, ASTP, NATP, ABA, AIA, and TEI. Peter serves as a member of the Tax Faculty for CPAacademy, iShade and TaxConnections University (“TCU”). Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (“ASTP”) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable.

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