Following up on guidance issued in mid-October 2021 that the agency would be imposing new requirements on amended returns filed for research credit claims under IRC §41, the IRS has issued a memorandum to its employees on these new requirements[1] along with a web page of frequently asked questions (FAQ) on the issue.[2]

Contents of Original October 15 Advice

The original Field Advice[3] provided that the IRS would begin requiring specific information to be provided with each such claim and that if such information was not provided that the claim for refund would be rejected as invalid.  Such a rejection would not be treated as the IRS formally denying the claim, as the Advice argued that such an invalid claim was not a proper claim for refund necessary to show that taxpayers had exhausted administrative remedies before pursuing a claim in court.

Thus, assuming the Advice’s view of this issue is upheld when tested in actual litigation, taxpayers would need to submit an amended return that contained all information required in the proper form before the expiration of the statute of limitations for filing for such a claim.

The Field Advice provided that the IRS would phase in the program as follows:

• For claims postmarked on January 10, 2022 or after,[4] the IRS will provide taxpayers with a 30-day grace period to perfect claims that did not meet the requirements before the claim would be rejected as invalid

• One year later (thus, for claims beginning January 10, 2023) the IRS will no longer provide a grace period to perfect such claims, and would rather simply reject them as invalid.

We published an article on these developments when they took place in October of 2021.[5]

January 3 Memorandum

The January 3 memorandum provides revisions to the Internal Revenue Manual to implement these procedures.

While many of the details remain the same, the IRS did change one key item—the grace period has been extended to 45 days from the 30-day period found in the original Field Advice.

(1) For claims that include a claim for credit for increasing research activities (“research credit claim”) filed January 10, 2022 through January 9, 2023 (the transition period) taxpayers will be given 45 days to perfect the claim that is timely filed but does not provide the five foundational criteria in IRM 4.46.3.7.x.

…

(3) During the transition period, a claim that includes a claim for research credit that would otherwise be considered timely pursuant to IRC 6511(a) but does not meet the requirements of IRM 4.46.3.7.x, will be considered timely filed if perfected within the 45-day timeframe. Taxpayers that fail to provide the required information as listed in IRM 4.46.3.7.x will be notified with Letter 6428, Claim for Credit for Increasing Research Credit Activities — Additional Information Required. The 45-day perfect period will start from the date Letter 6428 is issued. All refund claims that include a claim for research credit filed on or after January 10, 2023, will be subject to the general rules of IRC 6511(a).

The memorandum contains the following table[6] of items that any claim for refund related to a research credit must contain:

The claim should provide the total amount of each of these expense types. If the Form 6765 or its equivalent is properly completed, that will satisfy this item.

The memorandum also provides that:

…a declaration signed under the penalties of perjury verifying that the facts provided are accurate is required. In most cases, the signature on Forms 1040X or 1120X serves this function.[7]

The memorandum directs employees who receive an invalid claim to provide the following warning to the taxpayer submitting that claim when it is rejected as invalid:

If during an examination, the taxpayer submits a deficient claim for refund or raises an affirmative issue that does not meet the criteria for a claim for refund, examiners should advise the taxpayer to file a valid claim for refund (before the RSED expires) if they want to protect their opportunity to recover a refund related to the issue. LB&I examiners must refer to IRM 4.46.3.7.2.2, Claims Not Meeting the Standards of Treas. Reg. 301.6402-2. SB/SE examiners may generally consider the issues in a deficient claim.[8]

As the analysis in the original Field Advice concluded that the IRS had previously lost the ability to argue no valid claim had been filed to challenge a court filing by having worked the case, the memorandum warns IRS employees to avoid taking any actions involving considering the claim:

Exception: For a deficient research credit claim, the claim issues must not be considered. See IRM 4.10.11.2.1.1.1 and IRM 4.46.3.7.X for additional information.

(3) Examiners must not use claim letters or claim for refund language in reports (e.g., references to “disallowing the claim”) for examinations where a deficient claim was raised; such language could be deemed as waiving the defects of the deficient claim.[9]

Claims Filed in the One Year from January 10, 2022 to January 9, 2023

The memorandum provides specific procedures IRS employees are to follow during the one-year transition period for claims:

• Evaluate the claim for the five criteria outlined in IRM 4.46.3.7.x and verify that it is signed under penalties of perjury to determine validity and document the results of the evaluation in the case file. This determination should generally be completed within 30 days after received in the field examination team.

• If the claim is determined to be valid, examiners will follow appropriate risking procedures and determine if an examination of the claim is warranted.

• If a claim is determined to be deficient, examiners will first issue Letter 6428, Claim for Credit for Increasing Research Credit Activities — Additional Information Required, allowing 45 days to perfect. If information that meets the requirements of IRM 4.46.3.7.x is received within the 45 days provided, the examiner will continue under normal risking procedures. If sufficient information to perfect the claim is not received pursuant to the process set forth in the letter, the claim will be considered deficient, and taxpayers will be issued Letter 6430, No Consideration, Section 41 Claim. Management (i.e. Territory Manager) and counsel must concur that the claim does not meet the criteria outlined in IRM 4.46.3.7.x prior to issuing Letter 6430.

• If the claim is deficient, do not consider the claim issues or include claim language in a report. In addition to providing the taxpayer Letter 6430, a Form 3870, Request for Adjustment, is required to reverse the transaction code posted to the master file and to remove freeze code "-A." EEFax Form 3870 to CCP to input a TC 290 for zero to release the freeze code. efer to IRM 21.5.6.4.2, -A Freeze.[10]

Procedures for Claims Received on or After January 10, 2023

Following the end of the one-year transition period, the memorandum provides the following procedures for IRS employees to follow:

• Evaluate the claim for the five criteria outlined in IRM 4.46.3.7.x and verify that it is signed under penalties of perjury to determine validity and document the results of the evaluation in the case file. This determination should generally be completed within 30 days after received in the field examination team.

• If the claim is determined to be valid, examiners will follow appropriate risking procedures and determine if an examination of the claim is warranted.

• If the claim is determined to be deficient, examiners will issue Letter 6430, No Consideration, Section 41 Claim to the taxpayer. Management (i.e., Territory Manager) and counsel must concur that the claim does not meet the criteria outlined in IRM 4.46.3.7.x prior to issuing Letter 6430.

• If the claim is deficient, do not consider the claim issues or include claim language in a report. In addition to providing the taxpayer Letter 6430, a Form 3870, Request for Adjustment, is required to reverse the transaction code posted to the master file and to remove freeze code "-A." EEFax Form 3870 to CCP to input a TC 290 for zero to release the freeze code. Refer to IRM 21.5.6.4.2, -A Freeze.[11]

[1] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022, https://www.irs.gov/pub/foia/ig/lbi-04-0122-0001.pdf (retrieved January 7, 2022)

[2] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS website, January 5, 2022 revision, https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions (retrieved January 7, 2022)

[3] Field Advice 20214101F, October 15, 2021

[4] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS website, January 5, 2022 revision

[5] Ed Zollars, “Memorandum Outlines Minimum Information That Will Be Required for a Research Credit Refund Claim to Be Accepted,” Current Federal Tax Developments website, October 15, 2021, https://www.currentfederaltaxdevelopments.com/blog/2021/10/15/memorandum-outlines-minimum-information-that-will-be-required-for-a-research-credit-refund-claim-to-be-accepted (retrieved January 7, 2022)

[6] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022

[7] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022

[8] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022

[9] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022

[10] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022

[11] “Memorandum for All Large Business and International and Small Business Self Employed Employees,” LB&I-04-0122-001, January 3, 2022