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The IRS has expanded the 30 day period to provide information to back up research credit refund claims to 45 days. The extension pertains to the research and development credit. They also released a few new guidelines to help businesses navigate the tax claims.

IRS Requirements for Valid Research Credit Refund Claims

The IRS requires that taxpayers identify all the business-related components that relate to the research credit claim for each year.  Additionally, for each component, they now require the following information:

  • All research activities performed
  • Names of the individuals who performed each of the research activities
  • Information each individual was attempting to discover
  • Amount of qualified wage expenses per employee
  • Total qualified expenses for supplies
  • Total amount of expenditures for qualified contract research for the claim year

The IRS is granting a grace period until January 10, 2022, before they require this information to be included with research credit claims for tax refunds. After this initial grace period, they will allow a one-year transition period for taxpayers. After the grace period, taxpayers will have 45 days to “perfect” their research claim credit before the IRS makes a final decision on the claim. Prior to these guidelines, there were only 30 days allowed to perfect the claim.

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What does it mean to “perfect” a research credit claim for a refund?

In their newly updated FAQs, the IRS explained what “perfect” means as it applies to the research credit refund claim. Taxpayers will be notified of deficiencies in a claim during the transition period. They are then allowed 45 days to perfect the claim by providing any missing information. The taxpayer will receive a letter from the IRS detailing the missing information.

Determining the Validity of Claims

The IRS has also issued new interim guidance for tax examiners. The new guidance outlines the procedures required to determine the validity of a claim. The transition period extends from January 10, 2022 to January 9, 2023. Taxpayers who file a research credit claim during the transition period will be given 45 days to perfect the claim. In addition to providing the missing information, taxpayers will also need to sign a Form 1040X or Form 1120X under the penalties of perjury to declare the facts provided are accurate.

The IRS has been stepping up requirements for validating the research and development credit refund claim for some time. They want more information about each of the business components. Improper R&D tax credit claims is one of their “dirty dozen” tax scams. The new guidance seems to be an effort to crack down on bogus claims. However, many taxpayers and tax professionals feel as though it complicates matters for those who have legitimate tax credits.

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Perils of a Cookie-Cutter Research and Development Tax Claim

The research credit claim was an incentive to help keep R& D jobs in the US, but it’s been around for over 40 years. The added scrutiny and documentation requirements can be intimidating to taxpayers who operate businesses of varying sizes. On the other hand, the challenge the IRS faces is understanding what type of documentation a taxpayer has available to substantiate qualifying for the credit. To ask all businesses regardless of their size to document seems a bit unfair. The one-size-fits-all approach frustrates taxpayers. It is frustrating for those who may not know for sure what documentation they have on hand. Also, taxpayers may not be aware of the required format for substantiating claims. This may add to undue stress for smaller businesses that will need to acquire the assistance of a tax professional to help with tax preparation.