The IRS released a News Release[1] and 22-page Chief Counsel Memorandum[2] that set forth information a claim for refund related to the research credit under IRC §41 will be required to contain to be considered a valid claim.  The News Release states:

The IRS has set forth the information that taxpayers will be required to include for a research credit claim for refund to be considered valid. Existing Treasury Regulations require that for a refund claim to be valid, it must set forth sufficient facts to apprise IRS of the basis of the claim. The Chief Counsel memorandum will be used to improve tax administration with clearer instructions for eligible taxpayers to claim the credit while reducing the number of disputes over such claims.[3]

The IRS explains the reasons for releasing this memorandum that will be used to determine if credit claims will be allowed to move forward as follows:

Effective tax administration entails ensuring taxpayers understand what is required to support the claim for the research and experimentation (R&E) credit. Each year, the IRS receives thousands of R&E claims for credits in the hundreds of millions of dollars from corporations, businesses, and individual taxpayers. Claims for research credit under IRC Section 41 are currently examined in a substantial number of cases and consume significant resources for both the IRS and taxpayers.

The Chief Counsel legal advice released today is the result of ongoing efforts to manage research credit issues and resources in the most effective and efficient manner. By requiring taxpayers to provide the information referenced below, the IRS will be better able to determine upfront if an R&E credit claim for refund should be paid immediately or whether further review is needed.[4]

The News Release summarizes the information requirements found in the memorandum as follows:

Specifically, the opinion provides that for a Section 41 research credit claim for refund to be considered a valid claim, taxpayers are required to provide the following information at the time the refund claim is filed with the IRS:

• Identify all the business components to which the Section 41 research credit claim relates for that year.

• For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as 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.[5]

The News Release notes the IRS will phase-in the requirements, with the requirements being strictly enforced beginning in January 2023:

The IRS will provide a grace period [until January 10, 2022] before requiring the inclusion of this information with timely filed Section 41 research credit claims for refund. Upon the expiration of the grace period, 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 IRS’ final determination on the claim. Further details will be forthcoming; however, taxpayers may begin immediately providing this information.[6]

Advisers who prepare claims for refund for the IRC §41 research credit should begin studying the entire memorandum so that claims will not be returned to the taxpayer beginning early next year, or simply immediately rejected beginning in early 2023.

[1] “IRS sets forth required information for a valid research credit claim for refund”, IRS News Release IR-2021-203, October 15, 2021, https://www.irs.gov/newsroom/irs-sets-forth-required-information-for-a-valid-research-credit-claim-for-refund (retrieved October 15, 2021)

[2] CCA 20214101F, October 15, 2021, https://www.irs.gov/pub/irs-lafa/20214101f.pdf (retrieved October 15, 2021)

[3] “IRS sets forth required information for a valid research credit claim for refund”, IRS News Release IR-2021-203, October 15, 2021

[4] “IRS sets forth required information for a valid research credit claim for refund”, IRS News Release IR-2021-203, October 15, 2021

[5] “IRS sets forth required information for a valid research credit claim for refund”, IRS News Release IR-2021-203, October 15, 2021

[6] “IRS sets forth required information for a valid research credit claim for refund”, IRS News Release IR-2021-203, October 15, 2021