Does Latest IRS Guidance Signal New Firm Stance on Research Credit Refund Claims?

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On October 15, 2021, the Internal Revenue Service (IRS) issued a press release related to required information for valid research credit refund claims. The press release contains a link to a memorandum by two IRS employees, which will be used to evaluate such claims, and states that there will be a grace period (until January 10, 2022) before such information will be required to be included with timely filed research credit refund claims.

The guidance referred to in the press release is from the IRS’s Office of the Chief Counsel, Memorandum 20214101F (the IRS Research Memo) dated September 17, 2021, which focuses on administrative claims for refunds respect to the Internal Revenue Code (IRS) section 41 research credit.

First, we recommend reviewing the IRS Research Memo because it does a good job explaining the necessary elements to claim the credit. Second, the IRS Research Memo is a good reminder that the first requirement is to file a refund claim that is sufficiently detailed in order to give the IRS notice on both the technical and factual basis of the refund claim. In the context of the IRC Section 41 credit, the IRS Research Memo provides the following as minimum requirements for a refund claim:

  • Identify all the business components to which the IRC Section 41 research credit claim relates for the year for which a refund is sought.
  • For each business component:
    • Identify all research activities performed
    • Identify all individuals who performed each research activity
    • Identify all the information each individual sought to discover
  • 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 refund claim must be signed under penalties of perjury attesting to the veracity of the facts and information stated therein.
  • Supporting facts should be in the form of a written statement and merely incorporated by reference to documents attached to the claim.
  • The refund claim must be filed within the period of limitations stated in IRC Section 6511. Typically, taxpayers must file a valid claim within three years of the date Form 1040 or Form 1120 was filed or two years from the time the tax was paid—whichever period expires later.

Importantly, the IRS Research Memo does not advise taxpayers on how much information the IRS believes is sufficient to make a valid claim for refund. The IRS Research Memo does, however, highlight some recent court decisions where taxpayers were denied a refund because they did not include sufficient facts in their IRC Section 41 refund claim. In those cases, the courts ruled that the refund claims were defective and untimely.

Practice Point: The IRS Research Memo is a good reminder that when it comes to refund claims, generally, more description and detail is better. Interestingly, if the taxpayer had claimed a research credit on the original return, there would be very little factual information for the IRS to review. However, when it comes to refund claims, taxpayers are required to provide more information. The IRS Research Memo also signals that the IRS may be looking much harder at refund claims for the IRC Section 41 research credit. If you are thinking about filing one, make sure to be comprehensive and consider having it reviewed by your tax professional.

Another point about the IRS Research Memo is that it is contained in what is normally referred to as private guidance, (i.e., Guidance that is not published in the Internal Revenue Bulletin (IRB) and, therefore, is technically not binding on the IRS). It remains to be seen whether the IRS will restate or revise this guidance and publish it in the form of a revenue ruling or revenue procedure that would be published in the IRB.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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