IRS Updates R&D Tax Credit Refund Documentation Requirements

The IRS has released a significant change regarding the documentation requirements for research and development (R&D) credit refund claims. Effective for claims postmarked on or after June 18, 2024, the IRS no longer requires taxpayers to provide the following two items with R&D refund claims:

1. Names of Individuals: Previously, taxpayers needed to provide the names of the individuals who performed each research activity.
2. Information Sought: Taxpayers also needed to provide the information each individual sought to discover.

Background

In October 2021, for the first time, the IRS began requiring specific documentation for the R&D credit when the claim resulted in a refund on an amended return. Historically, taxpayers were able to claim a refund by filing an amended income tax return in the same manner as they would report the credit on an original return without the need to provide company-specific information. The 2021 requirements significantly changed this by asking for detailed information on the taxpayer’s specific research activities.

The 2021 requirements were met with backlash from taxpayers due to the potentially burdensome task for some taxpayers to collect the information in the IRS’ very specific required format.

What Do the New Rules Mean for Taxpayers?

The new rules will make it easier for taxpayers to file refund claims. Although it’s no longer required to provide each researcher’s name and details on the information being sought, it’s important to remember that this may be requested under audit. Therefore, it’s a best practice to gather and retain such information.

Additionally, taxpayers should remember that not all documentation requirements have been withdrawn and the following three items are still required:

1. Identify all of the business components to which the IRC § 41 research credit claim relates for that year.
2. For each business component, identify all research activities performed.
3. 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).

For further guidance or assistance with your R&D credit claims, please contact your KSM advisor or complete this form.