IRS Extends Transition Period for Perfecting R&D Tax Credit Claims

IRS Extends Transition Period for Perfecting R&D Tax Credit Claims

Jonathan Tucker, Principal • Research & Development Tax Credit Services

In this post, we discuss the recent IRS update as of October 30, 2023. The IRS has extended through January 10, 2025, the transition period for perfecting research credit refund claims prior to IRS’ final determination on the claim. The IRS has also updated the research credit FAQ page with examples of best practices to submit R&D claims. The extension has significant implications for R&D tax credit claims. We will also provide context around the rules of Research Credit Claims under Section 41 on Amended Returns. 

Recent IRS Update - October 30, 2023

The IRS has extended the transition period for perfecting research credit claims for another year, now through January 10, 2025. This extension provides taxpayers with 45 days to perfect their research credit claim for a refund before the IRS’s final determination on the claim. This is not the first extension; the transition period was initially set to end on January 10, 2022, and was subsequently extended. This extension aims to streamline the process, ensuring taxpayers provide all necessary information with their refund claims.

The Importance of the Five Items of Information

For context and to provide a thorough understanding of the IRS update concerning the R&D Tax Credits, it is crucial to be familiar with the “five items of information” that taxpayers are required to provide when filing a claim for a refund involving a Research Credit under Code Section 41. These items are: 

  1. Identifying all business components to which the Section 41 research credit claim relates for that year. 
  2. For each business component, identify all research activities performed, and 
  3. Identify all individuals who performed each research activity, and 
  4. Identify all the information each individual sought to discover. 
  5. Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year (this may be done using Form 6765, Credit for Increasing Research Activities) 

Transition Period and Grace Period

The IRS offered a grace period until January 10, 2022, before making it mandatory for taxpayers to include the five items of information with timely filed Research Credit claims for refunds. After this grace period, a one-year transition period was granted to taxpayers. During this transition period, taxpayers had 45 days to perfect their research credit claims for refunds before the IRS’s final determination. In 2022, the IRS issued additional extensions for the transition period through January 10, 2024. 

 The recent extension now provides an additional year, taking the transition period through January 10, 2025, allowing taxpayers 45 days to perfect a research credit claim for refund before the IRS’s final determination during this period. The goal is to enable taxpayers ample time to provide all the necessary information to substantiate their claims and minimize the chances of disputes or delays. 

Updated research credit refund claim FAQs. 

The IRS has also updated its Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions to provide, in FAQ20, best practices for submitting the five items of information the IRS requires before it will process research credit refund claims.  

In addition, the IRS has updated FAQ17 to clarify that the five items of information are required for any research credit refund claim — whether formal or informal. 

Note. Taxpayers that file Form 1120, U.S. Corporation Income Tax Return, cannot file an informal research credit refund claim. These taxpayers must file a formal amended return to make a research credit refund claim.  

FAQs - Your Guide to Handling Amended Returns

Given the significant changes that have taken place, it is imperative that we take a closer look. These changes are of utmost importance, and we must not overlook their impact. The following points are sourced directly from the IRS FAQ. 

Here are common questions to help CPAs and their firms navigate the landscape of amended returns involving Research Credit: 

  

  1.  Will the IRS continue to accept input from taxpayers and representatives on the requirements?
    • Yes, the IRS is open to feedback and plans to monitor the process closely to make necessary modifications if required.
  2.  Will the five required information items apply to refund claims postmarked before January 10, 2022?
    • No, they only apply to claims postmarked after this date.
  3. Will the IRS review each Research Credit claim for a refund to determine its validity?
    • Yes, the IRS will assess the validity of each claim.
  4.  What happens if an amended return contains the Research Credit and other items?
    • If your amended return does not include a claim for refund (even if it contains the Research Credit) or does not request an adjustment to the Research Credit claimed on your original return (even if it does include a claim for refund not involving the Research Credit), the five items of information are not required to be provided with your amended return. The IRS may, however, later require you to provide the five items of information to substantiate your entitlement to the Research Credit, if your return is selected for examination.
    • If your amended return includes a claim for refund related to the Research Credit (even if it contains other items), you are required to provide the five items of information with your amended return. 
  5. How long will it take the IRS to process a claim for a refund involving the Research Credit?
    • The IRS aims to process Research Credit refund claims within six months of receipt.
  6. What instructions will be provided to examiners handling claims for refund involving the Research Credit?
    • The IRS has issued Interim Guidance to ensure consistent handling of such claims.
  7.  Will taxpayers receive notification of deficient claims?
    • During the transition period, taxpayers will be informed of deficient claims and given 45 days to perfect them.
  8. What does “perfecting” a claim for a refund mean?
    • It means providing any missing information required to process the Research Credit refund claim.
  9.  In what format should taxpayers provide their initial response to the IRS?
    • The required information can be provided on paper or through facsimile. Electronic storage devices are not accepted. 
  10.  Is there an alternative method to identify individuals who performed research activities?
    • Job titles or positions may be used instead of names, but specific names may be requested later during review. 

 These FAQs provide essential insights into how to handle amended returns for Research Credit claims in compliance with the recent IRS updates. 

Staying up to date with IRS regulations is vital for CPAs and their firms. The recent IRS extension, which extends the transition period for perfecting research credit claims, significantly changes the landscape of amended returns. By providing the necessary five information items, taxpayers can streamline their claims and minimize the chances of disputes. Understanding and implementing these requirements is essential for a smoother tax season and more satisfied clients. 

As a CPA, you must ensure your clients are well-informed about these changes and that their claims comply with the updated regulations. This knowledge will not only enhance your services but also contribute to a more efficient and hassle-free tax season.