IRS Guidance on Amending Returns for R&D Tax Credit
The IRS issued a Chief Counsel memo in fall 2021 outlining specific information now required when amending a tax return to include the R&D tax credit. This supplemental information will be used to aid the IRS in expediting their review process of amended returns.
This new requirement for supplemental information impacts any taxpayer planning to amend their tax return for an R&D tax credit after January 10, 2022. If the IRS finds the information provided deficient, the credit claim could be denied.
Previously, amended returns were treated similarly to timely filed returns, wherein taxpayers would only need to provide supplemental documentation upon request.
The supplemental documentation is to be included in the amended tax return to be reviewed by an IRS agent upon submission. If the claim were to be found deficient, the return would be denied. The taxpayer would then have 45 days to perfect the claim and resubmit it to the IRS.
What is a Valid Tax Credit Claim?
In order to be a valid claim, as defined by the IRS, Taxpayers must:
- Identify all the business components to which the Internal Revenue Code (IRC) Section 41 research credit claim relates for that year.
- Identify all research activities performed for each business component.
- Name the individuals who performed each research activity.
- Describe the 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 may be done using Form 6765, Credit for Increasing Research Activities.
Additional Details and FAQs
- Transition Period
- The IRS extended the transition period to January 10, 2024. During the transition period, taxpayers who file an amended tax return for an R&D credit claim will be allowed 45 days to perfect their claim if the IRS finds the initial filing deficient.
- After this transition period closes, credit claims that are denied can’t be fixed or appealed.
- Taxpayers will not receive any refunds for the credits they attempted to amend.
- What is “Perfecting a Claim for Refund?”
- Perfecting a claim means taxpayers have the opportunity to provide missing information to process the R&D credit claim.
- The IRS will notify taxpayers of a deficient claim and provide a maximum of 45 days to perfect the claim. The letter sent to the taxpayer will include the date by which the taxpayer must provide the updated claim.
- Does supplementary documentation need to be submitted if a claim isn’t being amended for a refund?
- No. If an R&D credit is submitted on an amended tax return that doesn’t result in a refund to the taxpayer, the supplementary documentation for the claim doesn’t need to be submitted with the amended tax return.
- What’s the preferred method to provide missing information to the IRS?
- The IRS noted that the best way to provide missing information for a deficient claim is by fax to a designated number. You can also send information by mail.
- As of publication date, the IRS planned to have amended tax returns with R&D credit claims reviewed and processed within six months of receiving the amended tax return.
- Pass through entities
- If a claim for refund that includes the Research Credit is based on a Research Credit from a BBA partnership, the BBA partnership does not file an amended return. Instead, the BBA partnership must file an administrative adjustment request (AAR) and attach the five items of information to that AAR. As part of the AAR process, the BBA partnership will also submit Forms 8985 and 8986 to the IRS and send Forms 8986 to its partners. The BBA partnership is not required to provide the five items of information again on the Forms 8985 and Forms 8986. The BBA partners do not need to attach the five items of information to their original returns to which their Forms 8986 are attached.
- If a claim for refund that includes the Research Credit is based on a Research Credit from a non-BBA pass-through entity (such as a TEFRA partnership, S corporation, or other non-TEFRA/non-BBA partnership), the non-BBA pass-through entity may include the five items of information with its amended return. Partners or shareholders are required to include the five items of information with their amended tax return claiming the Research Credit. Partners or shareholders should receive the five items of information from the partnership or S corporation in which they are a partner or shareholder, for example, in the form of an amended Schedule K-1 (and any statements attached thereto).
- What if you e-file an amended return?
- Taxpayers who e-file their amended return claiming a refund involving the R&D tax credit are still required to provide the five items of information with their e-filed amended tax return.
- Statistical Sampling
- Revenue Procedure 2011-42 provides guidance to taxpayers on using statistical sampling.
- If taxpayers utilize a statistical sample to compute their Research Credit, the documentation for all units in the sample must contain the first four items of information and must be provided with the claim for refund.
- Taxpayers utilizing a statistical sample to compute their Research Credit are still required to provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses, as computed pursuant to Rev. Proc. 2011-42, for the claim year with the claim for refund.
Additional questions have been answered in an FAQ released by the IRS.
Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.
Who We Are:
Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.
Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.