Big Changes on the Horizon for R&D Tax Credits as IRS Issues New Procedural Filing Requirements

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On October 15, 2021, the Chief Counsel of the IRS quietly released a new procedural requirement for businesses claiming refunds for research tax credits, kicking up some clouds of doubt and frustration. As the IRS undertakes this new initiative to validate claims, it leaves many businesses wondering about the status of their refund. This is a major departure from their prior policy that required no preapproval.
In a nutshell, the IRS did have a routine of asking for documents during an audit, but businesses were not required to include them with their R&D credit claim for refund.

Four insights you need to know

  • The IRS has a new documents requirement for businesses that want an R&D tax credit refund
  • The IRS will review the written documentation to determine eligibility prior to distributing refunds
  • A grace period is in effect until January 10, 2022, followed by a one-year transition period
  • Failure to adhere to these new requirements may result in a denied R&D tax credit refund

Due to the ambiguity in the Memorandum, it remains unclear as to the impact these new requirements will have on tax returns. Our interpretation is that the businesses that must adhere to these new requirements are ones that have filed an amended return. However, Astute is closely monitoring the IRS communication channels for further guidance.

What documents do you need to submit?

To meet the new requirements for your R&D credit refund claim, you need to:

  1. Identify each business components included in the claim
  2. Detail all research activities performed, including all persons involved in that specific component
  3. Submit all qualified research expenses

If you are in the process of filing an R&D Tax refund claim, you will need to begin assembling all your documentation now. If you are considering filing a new R&D tax credit claim, ensure that you fully document every research activity that is executed.

Filing a successful claim

Complying with these newly-released requirement guidelines requires vast knowledge about the multidimensional layers of the R&D tax credit, the IRS tax code, and treasury regulations. We have a solid history of helping businesses file a successful claim – even when a tax return is amended. Contact Astute and we will collaborate with you to ensure you have the proper documents to file your R&D tax credit.

What to know before you take your first step

So far, we’ve addressed R&D businesses that have already filed and are awaiting refunds. But what about organizations that are in the preliminary stages? Below is an overview:

  1. Many R&D studies don’t provide “nexus.” Instead, they only present estimates of time worked by individual – presumably qualified time – without any explanation. Nor do they tie it to qualified activity or associated quantitative impact on the credit. The IRS requires a comprehensive procedural filing requirement. Thus, an abbreviated study will not meet the new procedural filing requirements and runs the risk of being denied.
  2. Companies that have delayed claiming R&D tax credits in the past, may want to reconsider filing for credits before a refund opportunity arises. By taking action now, you may be able to avoid the new filing requirements and/or before they take effect.
  3. It’s critical that a study includes nexus between qualified business components and component qualified expenses, which are substantiated with contemporaneous knowledge and documentation. 

Got proof? Ready or not, the IRS has issued new procedural changes for R&D tax credit refunds. We understand the guidance and are ready to help.

The IRS is cracking down on illegitimate R&D tax credit claims and beginning in January, they will require more documentation. Allow us to clear up the confusion and help you pursue your claim.

The IRS will provide a grace period [until January 10, 2022] before requiring the inclusion of this information with timely filed Section 41 research credit claims for refund. Upon 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’ final determination on the claim. Further details will be forthcoming; however, taxpayers may begin immediately providing this information.

Sandhya Mukkamala

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