IRS Updates FAQs for Research Tax Credit Refund Claims
The IRS recently updated its frequently asked questions (FAQs) for taxpayers and practitioners submitting claims for refunds involving the research and development credit.
To dissuade taxpayers from submitting claims for tax breaks for research and development that was never implemented, last year the IRS issued a memorandum imposing new requirements for supporting claims for tax refunds for research and development credits. Last month, the IRS extended the deadline for “perfecting” claims from 30 to 45 days.
Timely claims filed during the transition period from Jan. 10, 2022, through Jan. 9, 2023, have 45 days to be perfected if they do not include the five essential pieces of information required by last year’s changes: identifying all business components that form the factual basis of the claim for the claim year; all research activities performed by each business component; all individuals who performed each research activity by business component; all information each individual sought to discover by business component; and the total qualified employee wage expenses, supply expenses and contract research expenses.
One of the questions in the new FAQs answers how taxpayers who file a refund claim that includes the research credit should comply with the requirement to provide the five items of information when the claim is based on a credit from a passthrough entity.
If a passthrough entity can be audited under the procedures of the Bipartisan Budget Agreement of 2015 (BBA), the partnership does not file an amended return. The BBA partnership must file an administrative adjustment request (AAR) and attach the five items of information. 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 Forms 8985 and Forms 8986, and the partners do not need to attach the five items of information to their original returns.
If a refund including the credit comes from a non-BBA passthrough entity, such as a TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) partnership, S corporation or other non-TEFRA or non-BBA partnership, it can include the five items of information with its amended return. Partners or shareholders must include the five items of information with their amended return claiming the credit.
Another issue addressed in the new FAQs is whether taxpayers who e-file an amended return claiming a refund including the credit are required to provide the five items of information with their e-filed amended return. Taxpayers are required to provide the five items of information, and passthrough entity taxpayers should follow the requirements for providing the five items as detailed in the prior answer.
The FAQ also answers whether a taxpayer may challenge an IRS determination that a claim for refund involving the credit is not valid before the IRS Independent Office of Appeals. Under existing IRS procedures, refund claims that are disallowed based on a timeliness determination are eligible for consideration by the Appeals office. The Appeals resolution process is not available for claims rejected on the basis that they are deficient or otherwise not processible.