Processing of R&D claims: January 2002.

In early January, the IRS's Large and Mid-Size Business Division requested Tax Executives Institute's comments on a proposal to centralize the processing of research tax credit claims in a single location (the Ogden Service Center) and possibly to require the filing of formal claims for refund (Forms 1120X) to effect a claim, rather than permitting an informal claim to be made during the course of the examination. In response to this request, TEI requested comments from members of its IRS Administrative Affairs Committee and other members of the Institute. The responses received, together with some concluding comments, were subsequently forwarded to the LMSB organization. They are reprinted below.

Response 1

The requirement of a formal claim seems to run counter to the desire to expedite issues and work cooperatively with taxpayers, particularly those under continuous audit. I haven't thought about this much, but we avoid 1120X like the plague due to the triggering of filing amended state returns. We save most things for the "Qualified Amended Return" at the start of the audit unless it could be significant dollar refund. Not sure if this would be different since it's a credit item, but nobody has time at year end to think about this. All companies are looking for cash, so a quick expedient way to process amounts is needed. Large case t/ps have probably had this issue looked at by their agents and it seems they should handle any refunds now due rather than adding a burdensome administrative requirement.

Response 2

Taxpayers in our area have been filing R&D Credit claims. I don't think a requirement to file a claim is an issue. [IRS Personnel] expressed concern about a flood of R&D Credit claims coming in as a result of the newly revised proposed regs. Most taxpayers did not agree with the discovery test etc. and probably would have been filing claims anyway. I would not expect a rush to occur.

Response 3

We won't be filing any claims. Our R&D is pretty straightforward. We really do have labs and guys in white coats. Most of our R&D projects are also done for FDA submissions. Our R&D would meet the requirements of the withdrawn regs. I'm thankful the documentation requirements were removed. We don't claim anything related to internal use software.

I don't have any issues with central processing, especially if the IRS thinks it will be more efficient.

Response 4

Filing a formal refund claim while under audit can be problematic. An officer must attest under penalties of perjury that the Form 1120X is true, correct and complete. Usually during an audit there are a number of issues in various stages of challenge -- first being questioned, following that there are negotiations, then correcting adjustments must be made that, in turn, impact other complicated tax calculations, such as inventory calculations and foreign tax credit calculations. Consequently, it is difficult to prepare an amended return prior to the completion of an examination and attest that it is true, correct and complete. Also, if you do file such an amended return and include items that are under challenge, most states require that amended state tax returns...