Breaking: IRS Introduces New Rules for R&D Tax Credit Refunds

At a glance:

• Big changes to R&D Tax Credits on the horizon: In a release published Friday, October 15, the IRS introduced significant new documentation requirements for businesses seeking R&D tax credit refunds.
• Changing the burden of proof: The memorandum announced that R&D refund claims must include written supporting documentation, which the IRS will review to determine eligibility before disbursing the refund.
• Uncertainty remains: Due to lack of clarity in the language, there is still some uncertainty regarding whether the new documentation requirements could extend to all R&D credit claims – not just amended returns – underscoring the importance of partnering with an experienced R&D Tax Credit preparer like Aprio.

Schedule a consultation with Aprio’s R&D Tax Credit team.

The full story:

In a Chief Counsel memorandum released Friday, October 15, the IRS announced that R&D credit refund claims must include supporting documentation proving eligibility for the credit beginning January 10, 2022. The IRS stated they will use the submitted documentation to determine whether to pay out credit refunds or conduct further eligibility reviews, which is a stark reversal from previous policy in which the R&D credit provided an immediate benefit when tax returns were filed without any pre-approval processes.

This new requirement is similar to the UK research credit regime, where all research credit claims must be approved by the UK’s Her Majesty’s Revenue and Customs (HMRC) and must provide specific documentation to substantiate the credits. Aprio has been delivering UK research claims for the past several years through their UK joint-venture, Moore R&D.

Due to unclear language in the Chief Counsel Memorandum, uncertainty remains whether these changes will impact all credit claims or only amended tax return claims seeking a refund for R&D either not claimed on an original tax return or modified from the original tax return filed. Aprio is monitoring for further guidance, but we are currently interpreting the announcement to imply only companies seeking credit refunds with amended returns must abide by the new documentation requirements.

What it means

The new requirement may come as a surprise to many R&D credit recipients and professionals; however, recent court cases have suggested heightened scrutiny related to the credit and associated procedures – namely, the specificity requirement. This requirement, defined in the Treasury Regulations, states that a claim for a refund must include an explanation of the taxpayer’s grounds for eligibility. However, the specificity requirement never provided any clear guidance on the level of detail companies should provide as substantiation when amending to claim the R&D credit for previous years.

The IRS’s latest memo provides that guidance, detailing the minimum requirements for supporting documentation and the new required timeline for submission.

What to expect

The new minimum requirements to substantiate a claim for an R&D credit refund includes three parts:

1. Identifying all of the business components included in the credit claim;
2. Detailing the research activities performed and the individuals involved for each business component; and
3. Providing the total qualified research expenses included in the credit claim.

The tax code defines a business component as “any product, process, computer software, technique, formula, or invention” that will be sold, leased, licensed, or used by a business. Activities relating to developing or improving business components are eligible for the credit.

Under the new requirements, businesses filing an amended return for the R&D credit must document precisely how each research activity meets the qualifications. Starting January 10, 2022, businesses will have a 30-day window after filing their amended tax return to submit the required documentation. Starting in 2023, the documentation must be submitted at the time of filing.

Ensuring a successful credit claim

Satisfying the new documentation guidelines will require an intimate understanding of the tax code, treasury regulations, and court rulings pertaining to the R&D tax credit. Meeting these requirements would be an insurmountable burden to any business attempting to benefit from the credit through an amended return without the assistance of a skilled R&D tax credit professional.

Whether the new documentation requirements apply to all claims or only a subset, Aprio’s R&D Tax Credit team is equipped to help. The latest requirements from the IRS closely align with the standards and processes Aprio has used to document our clients’ R&D credits for more than 10 years, making this change nearly inconsequential to the level of service we already offer.

Our experienced team includes knowledgeable tax advisors, skilled credit preparers, and a dedicated team of technical writers who collaborate to compute and document highly defensible R&D international tax credit claims, meaning we can save you time while maximizing your credit value and helping to avoid a potential rejected claim.

Schedule a consultation with Aprio’s R&D Tax Credit team to learn how these new requirements will impact your credit.