The Internal Revenue Service (IRS) released a Chief Counsel Memorandum (Memo), Interim Guidance, and FAQs (collectively "the Guidance") that significantly raises the bar on the minimum information taxpayers must provide to claim a research credit refund on amended returns under Internal Revenue Code (IRC) § 41.1 The IRS emphasizes that the below minimum information requirements apply to refund claims on amended returns, but are "not conclusive proof of a taxpayer's entitlement to the IRC § 41 research credit."2 Rather, the purpose of providing the following minimum information requirements is to allow the IRS to screen refund claims to determine whether further review is required or a refund should be paid. Further, the Guidance states IRS employees must determine the validity of a claim prior to beginning an exam.3 The list below represents the minimum information requirements for a valid Research Credit Refund Claim filed after January 10, 2022, followed by a more detailed explanation of each requirement.4
Minimum Information Requirements for a Valid § 41 Research Credit Refund Claim
- Minimum Sufficient Facts for each Business Component5:
- Identify the business component
- Research activities performed
- The individuals who performed the above research activities
- The information each above individual sought to discover
- Total qualified expenses for employee wages
- Total qualified expenses for supplies
- Total qualified expenses for contract research
- Statement of the Grounds
- Written Declaration:
- "Under the penalties of perjury, I declare that I have examined the facts represented in this statement and accompanying information, and, to the best of my knowledge and belief, they are true, correct, and complete. [signature]6"
- Signature on Forms 1040X or 1120X
Detailed Explanation of the New Minimum Information Requirements
- Minimum Sufficient Facts for a Valid Refund Claim should be in a Written Statement
Taxpayers must identify all business components and, for each business component individually identify all research activities performed, individuals who performed the research activities, and information each individual sought to discover. The requirement to identify each of these facts arises from the four-part statutory test that each business component must meet to have a valid claim for a refund.
Additionally, taxpayers must provide the itemized, total qualified expenses for employee wages, supplies and contract research. This may be done by attaching form 6765 to the claim for refund.
The minimum sufficient facts should be detailed in a written statement that establishes a nexus between activities and a business component. Defining activities at a detailed level may reduce audit risk. The written statement should also list technical uncertainties and the process of experimentation. Solely providing a volume of documents will not meet the minimum information requirements. See more on Supporting Documentation below.
- Relying on a Statement of the Grounds is not Enough for Valid Refund Claim
The Guidance emphasizes the distinction between sufficient facts and the grounds that are both required for a valid claim. A Statement of the Grounds is the legal assertion or theory the taxpayer is relying on to support a valid claim. Taxpayers must identify all minimum sufficient facts. Mere reliance on a legal assertion without providing sufficient facts may result in a rejected claim.7
- Valid Refund Claim Must Include a Written Declaration under Penalties of Perjury that all Statements are Accurate
A taxpayer must include a written declaration that the written statement is made and signed under penalties of perjury. This can be a signed statement or the taxpayer's signature on the amended return satisfies the written declaration requirement as well.8
The New Requirements Apply to Refund Claims on Amended Returns
At various public speaking engagements, IRS officials have stated that the Guidance applies only to claims for refund on amended returns and does not apply to credits reported on original returns, credit carryforward, or carryback adjustments or claims.9 While IRS officials may have stated this publicly, there is not similar language present in the Guidance limiting the application to only amended returns.10
Providing Supporting Documentation with the Refund Claim Is Not Required, but is Required During an Audit
It is important to note the difference between the "minimum information requirements" and "supporting documentation." The minimum information requirements are the "five essential pieces of information" that must be explained in the written statement included with the filed refund claim. Supporting documentation includes records (such as a credit study) that verify your refund claim, facts and information presented in the written statement. The Guidance states providing supporting documentation with the claim is not required; however, supporting documentation must be provided during an examination.
When providing supporting documentation, the taxpayer must identify the specific location within the documents that supports their claims and addresses the minimum sufficient facts. If part of the supporting documentation is a credit study, the written statement must specify the facts within the study that the taxpayer believes satisfies the minimum sufficient facts.
Providing supporting documents via "document dump" or the "shoebox method" increases the likelihood of a rejected claim. Supplying a volume of documents does not meet the minimum information requirement. The Guidance stresses the IRS is under no obligation to decipher taxpayers' documents. This illustrates the importance of the written statement to identify and prove the minimum sufficient facts for a valid refund claim.
After January 10, 2022, Taxpayers Will Have 45 Days to Perfect a Research Credit Refund Claim11
- January 10, 2022: Grace Period Ends – The IRS provided a grace period until January 10, 2022, after which, valid, timely filed § 41 research credit claims for refund must include the requirements detailed in the Guidance.
- January 10, 2022-January 9, 2023: The Transition Period – Following the January 10, 2022, grace period, there will be a one-year transition period. During the transition period, taxpayers are allowed "45 days to perfect a research credit claim for refund prior to the IRS' final determination on the claim."
- "Perfecting" a Research Credit Refund Claim - Taxpayers will be notified by the IRS of their failure to provide the "five foundational criteria" through Letter 6426C or Letter 6428, Claim for Credit for Increasing Research Credit Activities – Additional Information Required. The letter will inform taxpayers which of the five criteria is missing from the taxpayer's claim. Taxpayers will have 45 days from the letter's issue date to perfect their research credit refund claim.
When "perfecting" a claim by providing missing information, be sure to include another written declaration signed under the penalties of perjury.12
How We Can Help
If you have any questions regarding the requirements to claim the research credit or are concerned about the increased requirements to claim the research credit, please reach out to us at RandD-TCP@dhg.com.
1 IRS Field Attorney Advice (FAA 20214101F) on I.R.C. § 41 Research Credit Refund; Interim Guidance on Claims for Refund that Include a Claim for Credit for Increasing Research Activities, LB&I-04-0122-0001; Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions.
2 Browne, Mary Katherine, "New Research Credit Changes Apply Only to Amended Returns," 2021 Tax Notes Today Federal 230-3 (Dec. 2, 2021).
3 The latter was likely motivated by recent case law where courts found the IRS waived the specificity requirement because the IRS considered the merits of the research credit claim for refund before determining the validity of the claim. See Harper v. United States, 847 F. App'x 408 (9th Cir. 2021).
4 The IRS released the Memo, Interim Guidance, and FAQs in an effort to provide more guidance than the brief, broad requirements prescribed in Treas. Reg. § 301.6402-2(b)(1): taxpayers must detail the facts and grounds and provide a written declaration made under penalties of perjury.
5 Identify all business components and for each business component identified, list all research activities performed; all individuals who performed the research activities; and the information each individual sought to discover.
6 The sample written declaration here is based on the sample "Penalties for Perjury Statement" from IRS Publication 5 and Rev. Proc. 2022-1. Additionally, for a specific perjury statement regarding an amended return, see the signature requirement sections on Form 1040-X, 1065-X, 1120-X, etc.
7 Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1371 (Fed. Cir. 2000).
8 The importance of the declaration and signature requirement should not be underestimated. In a recent decision, the U.S. Court of Appeals for the Federal Circuit agreed with the IRS that because the taxpayers "neither signed their refund claims nor tendered powers of attorney to permit their tax preparer to sign the claims on their behalf," their refund claim was not duly filed; thus, the IRS properly disallowed the taxpayers' refund claim. Further, the court ruled that the IRS did not waive the signature requirement because it is a statutory requirement that cannot be waived by the IRS. Brown v. U.S., 129 AFTR 2d 2022-330 (Fed. Cir. Jan. 5, 2022).
9 The FAQs further provide that all five items of information are required for informal claims for refund of the Research Credit. See FAQ #14; Browne, Mary Katherine, "New Research Credit Changes Apply Only to Amended Returns," 2021 Tax Notes Today Federal 230-3 (Dec. 2, 2021); Bonner, Paul, IRS Official: New R&D credit documentation applies to amended returns, Journal of Accountancy, (Nov. 24, 2021).
10 While the IRS FAQs are titled, "Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions: Guidance/Process For Including the Five Items of Information on Amended Returns," it still does not state that the FAQs only apply to amended returns.
11 Please note that while the Memo initially stipulated 30 days to perfect the claim, the subsequently released Interim Guidance and FAQs provide for 45 days to perfect the claim.
12 "Subsequent submissions of facts and statements to perfect a claim must be accompanied by another written declaration regarding the accuracy of the information provided and signed under the penalties of perjury."