Transition Period Extended for Amended Returns Requesting R&D Credit Refunds

The IRS has announced a one-year extension of the transition period for taxpayers claiming a refund due to a research and development (R&D) tax credit. During the transition period, taxpayers will be granted 45 days to perfect a deficient refund claim. The extension to Jan. 10, 2024 is a welcome relief for taxpayers who are trying to understand the new IRS requirements and how to comply.

Taxpayers who plan to file an amended return and want to avoid a delayed or denied refund should review these requirements carefully and make sure to submit the claim during the transition period. Please note, this only applies to amended returns resulting in a refund and does not apply to originally filed tax returns.

Additional Background

In October 2021, the IRS provided specific documentation requirements for taxpayers filing an R&D credit refund. Taxpayers have historically not been required to provide detailed information on their R&D credit refund claim; a brief and fairly standard description was typically provided with the amended tax return.

The new guidance significantly changed this by requiring taxpayers to provide, at a minimum, the following information:

• Identify all of the business components to which the I.R.C § 41 research credit claim relates for that year.
• For each business component:
  • Identify all research activities performed;
  • Identify all individuals who performed each research activity; and
  • Identify all 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).

The new requirements were met with significant concern and criticism. Taxpayers were concerned that these requirements would be difficult and time consuming, resulting in fewer companies being able to claim refunds. Taxpayers also worried that it would allow the IRS to easily deny claims without providing taxpayers the opportunity to appeal. To help address these concerns, the IRS provided an initial grace period and then a transition period where taxpayers had an opportunity to perfect a claim. Before this new extension, the transition period was set to expire in January 2023.

Why Is This Important?

To claim a refund, a taxpayer must demonstrate that they have met the “specificity rule” which means that they have provided the factual and legal basis for the refund claim. A claim that does not meet these requirements is not considered valid. If the refund is denied after the statute of limitations or there is not enough time to submit a new claim after being denied, the taxpayer has no recourse except to challenge the IRS in court (no appeals hearings will be granted by the IRS). Whether or not a taxpayer has complied with these rules could have a significant monetary impact.

For those who are considering amending prior year returns to claim a refund, begin with these requirements in mind. While some of this information is normally gathered during the R&D credit analysis, taxpayers will likely have to take additional steps and be intentional to make sure each requirement is satisfied.

It’s unclear how this new process will impact the audits of such refunds. The IRS could potentially increase its number of audits based on the additional information provided and a better understanding of where to focus its attention. Alternatively, this new policy may decrease claims or cause taxpayers to apply more care when filing, which could result in better quality claims and fewer audits.

Please contact a KSM advisor with additional questions or complete this form.