Tax Strategies & Credits

Documentation Requirements for R & D Tax Refunds, Explained

Documentation Requirements for R & D Tax Refunds, Explained

If your business spends money on research and development, a recent legal memo published by the Internal Revenue Service will be of particular interest to you. Though these expenditures may entitle you to file for a refund for a tax credit for increasing research activities, the agency is now requiring additional supporting documentation. At this point, however, the expanded information is only required for claims submitted on amended returns.

The new documentation requirements were announced in mid-October and have been the topic of significant commentary and confusion.  According to the memo, the changes were necessitated by refund claims being submitted with “little or no information.” The lack of detail led the agency to open examinations to validate the expenses being claimed for administrative refunds to ensure that they provided the highly specific grounds and facts that apply to R & D credits. Despite a sufficiency requirement, the IRS had previously never published information as to what facts were required to meet it.  The new guidance makes clear that claims for a refund for R & D expenses must include:

  • Information about all business components to which the expense relates
  • Information about the research activities performed for each of the business components named
  • The name or names of individual or individuals who performed the research and development activity, including what information was being investigated, for each research activity
  • Using Form 6765, Credit for Increasing Research Activities, include the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year

Despite the fact that the change will only apply to amended returns, it has still been a source of consternation. Referring to concerns over the change, the American Institute of Certified Public Accountants (AICPA) issued a comment letter in mid-November asking the IRS to delay implementation of the new requirements beyond the IRS grace period set to end on January 10th of 2022, and others have expressed disappointment that the details were provided via a memo rather than thru the regulatory process. According to Rochelle Hodes, J.D. LL.M., principal of Washington National Tax, Crowe LLP, and the committee's vice-chair, the regulatory process would have allowed for public comment while no such opportunity exists following notification by a legal memo.

Responding to this criticism, Holly Paz, deputy commissioner of the IRS Large Business and International Division noted that the memo had provided an email address for comments and will issue interim guidance and the answers to frequently asked questions to assist taxpayers.

Stay tuned for more updates.

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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