Fernway DiarySM

Dec 23, 2021

Each year, the IRS receives thousands of research and development (R&D) tax credit claims, requesting hundreds of millions of dollars in credits. Unfortunately, not all those applications are legitimate. To prevent fraudulent refund claims, the IRS recently announced significant new documentation requirements for businesses seeking R&D tax credit refunds on amended tax returns.

New R&D Documentation Requirements

Beginning January 10, 2022, amended tax returns seeking R&D credit refunds must include documentation proving the taxpayer is eligible for the credit.

While it initially appeared that these documentation requirements applied to all R&D tax credit claims, the IRS later clarified that the new requirements apply only to claims on amended returns.

The documentation must include:

• Detailed information about all business components related to the R&D credit claimed that year
• All research activities performed for each business component
• Names of each individual who performed each research activities
• The information each individual sought to discover
• Total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses on Form 6765, Credit for Increasing Research Activities

The IRS Chief Counsel’s memorandum specifies that taxpayers should provide the required information in a written statement rather than attaching supporting documents. However, taxpayers who provide documents, such as a R&D credit study, must specify the exact page or pages supporting each fact.

This level of detail is routinely requested during an audit but had not previously been needed with R&D credit claims on amended tax returns. An IRS Field Attorney Advice (FAA) memo addressing the new requirements explained that they stem from refund claims being submitted with little or no information. Such requests required the IRS to open an examination to determine their validity.

Impact of the New Documentation Requirements

The IRS will provide a one-year transition period during which taxpayers claiming the R&D credit on an amended return will have 30 days to “perfect” their documentation before the IRS makes a final determination.

After that transition period ends, the IRS can reject the claim as invalid when an amended tax return does not meet the minimum requirements.

Companies claiming the R&D tax credit — either on an original or amended tax return — should not be discouraged by the additional documentation requirements. Proper R&D credit documentation has always included proof of all qualified research expenditures and other expenses to comply with IRS requirements and maximize the total potential tax savings.

However, it is a good time to visit your credit filing and documentation process and update them in light of the new requirements.

For more information, please contact your US tax advisory team at youradvisor@fernwaycolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:

The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.