Credit Refund Claims

IRS Changes Position of How to Make a Valid Research Credit Refund Claims

A most recent memorandum, 20214101F, released, explains the Internal Revenue Service (The Service) receives thousands of claims each year for the research credit in the hundreds of millions of dollars.  In that memorandum, The Service has documented taxpayers must now provide details about the kind of research they perform and how much money they spend on it when they file claims for refunds of the research and development tax credit.  Such information will better enable The Service to determine up front if a refund claim should be paid immediately, or whether future review is needed.

From that same memorandum, succinctly, The Service articulates for a research credit claim for refund to be considered valid, taxpayers must:

  • Identify all the business components to which the claim relates for that year;
  • Identify the research activities each component performed;
  • Name the individuals who performed them and 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 year, according to the memorandum.


The Service’s release states that a grace period will be provided until January 10, 2022, before The Service will require the inclusion of this information with timely filed section 41 research credit refund claims. After this date, there will be a one-year transition period during which taxpayers will have 30 days to perfect a research credit claim for refund prior to the final determination by the IRS on the claim.

Further details will be forthcoming, but The Service stated that taxpayers may begin immediately providing this information.

The memorandum has caught taxpayers and R&D Tax Credit Practitioners (Practitioners) by surprise as Practitioners weren’t aware that chief counsel was actively developing guidance on the issue.

The Service’s shift in position seems to be driven by some recent case law i.e., Harper and Premier Tech cases involving the small to mid-size businesses. In this arena, the recordkeeping habits of the clientele are, in most cases, average at best and many times do not provide the sufficient detail now required.

The Service and Practitioners have debated for years over the amount and kinds of information needed to satisfy the substantiation requirement of the Regulations and Practitioners have decried The Service’s latest mandate as creating an unduly burdensome filing requirement that could negate the credit’s value.  Because of it, there is high probability that The Service will get plenty of feedback.

Historically, The Service, in keeping with Congressional intent, eliminated a specific documentation requirement for the R&D Tax Credit in Treasury Decision 9104.

Treasury Decision 9104 clarifies “the 2001 proposed regulations do not contain a specific recordkeeping requirement beyond the requirements set out in section 6001 and the regulations thereunder. No change regarding record keeping is being made in these final regulations. The clarifications being made to the process of experimentation requirement do not impose any recordkeeping requirements on taxpayers beyond the requirements set out in Section 6001 and the regulations thereunder.”

In other words, The Service does not require that contemporaneous records be recorded in any specific manner. For example, the results of the experiments should be recorded in a manner for the particular field of science in which the experiment is conducted and for the type of experimentation involved. In some fields, experiments are recorded in lab books. When developing computer software, by contrast, the experiments might be recorded in comment lines contained in the source code.

However, the information required by the memo exceeds what needs to be provided on an original return and some of the facts requested are not required by the code, regulations, or any published authority relating to the research credit.  It is also unclear what is meant by “claim” and whether the information requirements also apply to research credits reported on original returns under scrutiny.

Furthermore, having to account in detail, the level of documentation demanded of discoveries for taxpayers with hundreds of projects and scientific or engineering employees is not feasible or practical where substantial administrative problems will arise with e.g., allocation of wages, particularly for smaller companies whose employees can engage in a variety of day-to-day activities and would find it overly burdensome to keep timesheets or other specific records. Only project accounting can account to such a level of detail which small to mid-size business tend not to have project accounting systems.  Large companies, in industries such as automotive and shipping usually have document retention policies where documents are discarded after a specified period of time, e.g., five years. 

According to the memo, the facts should be provided in a written statement rather than through the production of documents and the taxpayer must provide a declaration signed under the penalties of perjury verifying that the written statement is factually accurate.  Alternatively, if a taxpayer provides documents, including a credit study, the taxpayer must specify the pages that support each fact.

Problematic with providing a factually accurate written statement, with regard to the Great Resignation, millions are leaving jobs taking with them extensive corporate knowledge and history making it difficult, at best, to be recaptured or factually and accurately recorded posing an even greater barrier to make an effective case for any claims. 

Ultimately, there are many questions which have arisen and need to be answered with clarity and be more taxpayer friendly before the taxpayer will be inclined to engage such a pursuit.  If not, reluctance to pursue the R&D Tax Credit and ultimately abandoned affecting the American economy and innovation.

To engage such questions, the American Bar Association (ABA) Tax Section Jan. 7 released comments regarding memorandum 20214101F where The Service’s Chief Counsel’s Office provided specific instructions on how a taxpayer will meet the specificity requirements when filing a research credit refund claim. The ABA recommends that The Service issue proposed regulations to implement these I.R.C. §41 documentation requirements and postpone implementation and enforcement of the new requirements outlined in the memo until all parties concerned have had sufficient opportunity to analyze those new requirements and engage constructively with The Service.

Memo +


Related Posts

April 21, 2023

R&D & Section 174

Leave A Reply