Research credit refund claims: New documentation requirements.

• Author: Frost, Jennifer

On Sept. 17, 2021, field attorneys from the IRS Office of Chief Counsel issued memorandum 20214101F to key IRS personnel within the Large Business & International (LB&I) and Small Business/Self-Employed (SB/SE) divisions of the IRS. The Chief Counsel memorandum advises that taxpayers must provide additional information to make a valid Sec. 41 research credit refund claim on an amended tax return. In the memorandum, the IRS describes the minimum level of factual detail required to be included with the return to establish a valid refund claim, including these essential pieces of information:

* Identify all the business components to which the Sec. 41 research credit claim relates for that year.

* For each business component:

** Identify all research activities performed;

** Identify all individuals who performed each research activity; and

** 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).

Further, the taxpayer must submit with a claim a declaration signed under the penalties of perjury verifying that the facts provided are accurate.

Under this guidance, failure to include the required items listed above will result in a deficient or invalid refund claim, which permits the IRS to reject the claim without being subject to review by any federal court. Inclusion of the required information only establishes a procedurally valid claim but does not prevent the IRS from examining the claim in its normal course, either before or after payment of the requested refund.

The motivation behind these new requirements is to avoid paying refunds to taxpayers with frivolous claims lacking factual support and to assist the IRS in allocating its limited resources. The Chief Counsel memorandum also recommends that examining agents ensure the requirements have been satisfied before further examining the claim, so as not to waive the ability to enforce these requirements under Regs. Sec. 301.6402-2.

In a separate news release, the IRS clarified that these new requirements apply to any claims filed after Jan. 10, 2022. Additionally, after the expiration of the grace period, there will be a one-year transition period during which taxpayers will have 30 days to perfect a research credit claim for refund prior to the IRS's final determination on the claim.

Editor's note: In January, the IRS posted FAQs and issued a memorandum to IRS staff in which it expanded the period for perfecting a claim from 30 to 45 days and provided details on how the IRS will process claims under Sec. 41.

Legal requirements for a research credit refund claim

In the Chief Counsel memorandum, the IRS cites Regs. Sec. 301.6402-2 as its legal basis to require these additional disclosures. The regulation section provides procedural and formatting requirements for making a claim of refund, including when the claim can be filed, the forms to be used, the filing location, signature requirements, and other filing requirements. Also, under Regs. Sec. 301.6402-2 lies the...