IRS issues additional guidance for documentation of R&D tax credit refund claims
The IRS has released additional information about its new standards for documentation of refund claims based on the research and development (R&D) tax credit. The January 2022 releases include some FAQs and interim guidance for agents, as well as a modification to the “perfection period” set forth in the initial guidance.
Five items needed to document a refund claim based on the R&D tax credit
The new standards that were announced in October of 2021 require that a claim for refund based on the research credit include the following five essential pieces of information:
- The identification of all business components that form the basis for the research credit claim.
- A description of all research activities performed by each of those business components.
- A list of all individuals who performed each research activity within each business component.
- The information each individual sought to discover with the research performed.
- The total qualified employee wage expenses, supply expenses, and contract expenses related to the research activities.
The October 2021 guidance states that the IRS will apply these standards to R&D credit refund claims filed on or after Jan. 10, 2022. For the first year that the new standards are in effect, taxpayers who file an R&D refund claim that the IRS determines doesn’t include the five essential pieces of information will be given a period of time to “perfect” their filing before the IRS rejects the claim.
“Perfection period” extended for new R&D reporting requirements
The October guidance provided a one-year transition period during which taxpayers who filed R&D credit claims for refund that didn’t include the five essential pieces of information would be given 30 days to amend their filing to “perfect” the claim. The January 2022 updates modify the perfection period to allow taxpayers up to 45 days to provide the information that the IRS claims is lacking.
The January 2022 updates modify the perfection period to allow taxpayers up to 45 days to provide the information that the IRS claims is lacking.
The updates make no changes to the procedures on or after Jan. 10, 2023. Once the one-year transition period ends, any claim for refund that includes an R&D tax credit claim will be rejected in its entirety if the R&D credit claim doesn’t include the five essential pieces of information.
Individuals can be identified by title
The FAQs include a clarification that individuals can be listed by title instead of name when describing who performed each research activity. In the case of a group of individuals attempting to discover the same information for a specified business component, that group can be combined to avoid repetition.
No change in effective date
Since the release of the initial guidance in October 2021, several key stakeholders have raised concerns with the new documentation standard and asked the IRS to delay implementation. The new information released in January of 2022 does not delay implementation. As of Jan. 10, 2022, taxpayers filing a claim for refund based on the R&D tax credit will need to meet the new standards that the IRS has outlined.
Questions on R&D documentation remain
The new information from the IRS did little to address concerns about what constitutes a “business component,” nor did it offer any insights on the level of detail needed to describe the information that each individual sought to obtain with the research activity. The IRS has stated that it will “continue engaging with stakeholders on research credit issues,” so it’s possible that additional guidance will be forthcoming. All taxpayers who claim the R&D credit on their returns should monitor developments on this issue and contact their tax advisors with any questions related to their specific facts and circumstances. To learn more about how this guidance might affect your claim for an R&D tax credit, please give us a call.