IRS Rolls Back Some Requirements for R&D Refund Claims

At a glance:

• The main takeaway: As of June 18, 2024, the IRS is rolling back some of the upfront information required from taxpayers claiming an R&D credit on an amended return.
• Impact on your business: Although this shift in filing requirements does not change the level of documentation that companies are required to maintain as substantiation for the R&D credit, lessening the information required to file a refund claim will hopefully improve IRS turnaround times for processing those refund claims.
• Next steps: This change does not reflect a de-prioritization of documentation for taxpayers claiming the R&D credit. Work with an Aprio R&D specialist to develop best practices for maintaining appropriate substantiation to protect your credits.

The full story:

One June 18, 2024, the IRS announced a significant update to the filing requirements for R&D Tax Credit refund claims that will benefit taxpayers. Effective immediately, the IRS will waive the requirement for two of the original five pieces of information needed for filing a refund claim, alleviating the administrative burden on taxpayers and, hopefully, streamlining the process to receive refunds.

What is changing?

Although the IRS still requires the timely submission of both quantitative and qualitative information to substantiate a taxpayer’s claim for an R&D tax credit refund, they have waived the requirement to include the following information in the amended return:

1. The names of individuals who performed each research activity captured in the refund claim.
2. The information each individual sought to discover in the process of the research activities.

The IRS notes they are waiving these two requirements “after significant experience with the Research Credit refunds process,” which has been marked by extensive delays since these documentation requirements went into effect on January 10, 2022. Many taxpayers have not yet received any communication from the IRS on their refund claims, including refund checks, a notice of denial, or otherwise, and the IRS has not provided any further information on a prospective timetable for reviewing previously filed amended claims.

Ongoing Requirements

Taxpayers pursuing a refund are still required to provide the IRS with the following information:

1. A list of all business components included in the credit claim;
2. An explanation of all research activities performed for each business component; and
3. The Form 6765, Credit for Increasing Research Activities, as a listing of the total qualified expenses included in the credit claim. (Note: The IRS has proposed major changes to Form 6765 that, if approved, would require significantly more information from taxpayers.

The above information must be provided at the time of filing the amended return, and refunds will only be issued for claims the IRS has reviewed and approved. The IRS FAQ site for the R&D Tax Credit refund process states the IRS will attempt to issue their determinations on refund claims within six months of receipt. In practicality, many companies have observed the waiting period to be much longer.

The IRS has provided (and twice extended) a transition period through January 10, 2025, which allows taxpayers a 45-day opportunity to “perfect” their credit claim if the IRS deems the first submission to be deficient. Unless this transition period is extended again, that opportunity to provide additional information will no longer exist after January 10, 2025, and the IRS will deny insufficient claims with no recourse to appeal.

Best Practices for R&D Refunds

The IRS has demonstrated in recent years an increasing focus on documentation related to R&D tax credit claims and refunds. While waiving the filing requirement for some information will ease the refund claim process for taxpayers, the IRS also noted they maintain the right to request that information in the future, along with any other documentation they deem necessary to examine an R&D credit claim.

Taxpayer diligence in maintaining documentation and records of all research activities and expenditures is critical whether claiming the R&D credit on an original or amended return. Any activities or expenditures included in an R&D credit claim that cannot be properly substantiated through clear, dated records is subject to denial by the IRS.

The Bottom Line

This recent move by the IRS to reduce the information required to claim an R&D credit on an amended return is unequivocally a win for taxpayers. It is possible this signals the IRS is listening to feedback provided by taxpayers and tax preparers on this matter; it is also possible this merely signals the IRS taking steps to help reduce their backlog in reviewing refund claims.

Either way, taxpayers should not take this change as a sign that the IRS will deprioritize documentation for R&D credit claims. To better understand your business’s qualifications for the R&D credit and for assistance is developing best practices for recordkeeping when claiming the credit, schedule a consultation with Aprio’s R&D Tax Credit team.

Related Resources

• Will Claiming the R&D Credit Result in an Audit
• The R&D Credit Tax Form is Getting a Major Update
• Will Recent Changes to the Virginia Legislation Impact your R&D Tax Credit Benefits