On October 15, 2021 the IRS released a Chief Counsel Memorandum (CCM) detailing the information taxpayers will be required to include when filing a research tax credit refund claim on an amended tax return.
Background
IRS Chief Counsel Memorandum 20214101F was written in response to questions surrounding what information taxpayers should submit with claims for refunds for the Research & Experimentation tax credit. A CCM is written and signed by the Office of Chief Counsel to assist the IRS in administration of programs by providing legal analysis and technical advice.
Previously, refund claims were not required to include supporting information aside from that which is included on federal Form 6765, Credit for Increasing Research Activities. The memorandum references the Specificity Requirement of Treasury Regulation §301.6402-2, requesting the taxpayer to submit a written statement with sufficient information and facts to support the refund claim. The information must be submitted when the refund claim is filed, otherwise it will be rejected as deficient without consideration of the merits of the actual credit calculation.
Criteria
As the CCM is currently written, the taxpayer will be required to include the following:
- Identify all the business components to which the research credit claim relates for the tax year.
- For each business component, identify:
- All research activities performed
- All individuals who performed each research activity; and
- All 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 information is contained on Form 6765).
If a research credit study or other documents are submitted to meet this requirement, the taxpayer must specify the exact pages that support a specific fact in the document.
Timing
A grace period is provided in IR-2021-203 until January 10, 2022 before the above information will be required for inclusion with a research credit refund claim on an amended tax return. After this date, there will be a one-year transition period, where taxpayers will have 30 days to perfect a research credit claim and supply the additional required support, prior to determination of the validity of the claim by the IRS.
Open issues
A CCM cannot be used or cited as precedent. Further guidance from the IRS is expected on this issue, possibly in the form of a Revenue Procedure, but taxpayers must begin providing the required information immediately following the expiration of the grace period.
The CCM also does not specify what constitutes adequate support. It has not been specified what “best practice” documents look like, or the level of detail required for the description of the research activities performed and the explanation of the employees’ activities. This raises the question of practicality, as some taxpayers may have hundreds of qualified projects and employees in a given year.
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.