The IRS has provided more information on its new policies related to claims for refund for research credits under IRC §41 in updates to its frequently asked questions (FAQ) page on research credit claims.[1] The IRS originally disclosed its new policies in FAA20214101F and an accompanying press release on October 15, 2021.

Under the revised IRS policy, every claim must contain five items of information at the time the claim is submitted. A claim omitting any of that information is deemed to not be a valid claim for refund and, in the view of the IRS, will also not qualify as an informal claim to preserve the taxpayer’s right to continue the challenge if the statute of limitations has passed on filing the claim when the claim is rejected.

Research Credit Claim Based on Research Credit From a Passthrough Entity

The first addition to the FAQ deals with the situation where a taxpayer files an amended return based on a research credit from a passthrough entity. The new question reads as follows:

13. How do taxpayers who file a claim for refund that includes the Research Credit comply with the requirement to provide the five items of information when the claim is based on a Research Credit from a pass-through entity? (Updated February 8, 2022)[2]

The IRS finds that the answer depends on whether this is a partnership and, if so, if it was covered by the BBA audit regime for the year in question. The answer provides that the partners in BBA covered partnership do not provide the information, but rather the partnership does in its administrative adjustment request:

If a claim for refund that includes the Research Credit is based on a Research Credit from a BBA partnership, the BBA partnership does not file an amended return. Instead, the BBA partnership must file an administrative adjustment request (AAR) and attach the five items of information to that AAR. As part of the AAR process, the BBA partnership will also submit Forms 8985 and 8986 to the IRS and send Forms 8986 to its partners. The BBA partnership is not required to provide the five items of information again on the Forms 8985 and Forms 8986. The BBA partners do not need to attach the five items of information to their original returns to which their Forms 8986 are attached.[3]

For other passthrough entities, the equity holders will need to include the information with their own amended returns claiming a refund.

If a claim for refund that includes the Research Credit is based on a Research Credit from a non-BBA pass-through entity (such as a TEFRA partnership, S corporation, or other non-TEFRA/non-BBA partnership), the non-BBA pass-through entity may include the five items of information with its amended return. Partners or shareholders are required to include the five items of information with their amended tax return claiming the Research Credit. Partners or shareholders should receive the five items of information from the partnership or S corporation in which they are a partner or shareholder, for example, in the form of an amended Schedule K-1 (and any statements attached thereto).[4]

E-Filed Amended Returns and The Required Information

The IRS also answered a question regarding the impact electronically filing the amended return has on providing the required information:

14. Are taxpayers who e-file their amended tax return claiming a refund involving the Research Credit required to provide the five items of information with their e-filed amended tax return? (Updated February 8, 2022)

Yes. Please note, however, pass-through entity taxpayers (and their partners or shareholders) who e-file their amended tax returns should follow the requirements for providing the five items of information as stated in FAQ #13.[5]

Under What Conditions Can the Taxpayer Take the IRS Action Up with the Office of Appeals?

The final new question looks at when the taxpayer may challenge a determination related to a research credit claim by taking the case to Appeals. Not surprisingly, the IRS takes the position that if a claim is rejected for being deficient or unprocessible, the taxpayer does not have the right to take up that decision with the Office of Appeals:

15. If the IRS determines that a claim for refund involving the Research Credit is not valid, may a taxpayer challenge the determination before the IRS Independent Office of Appeals (“Appeals”)? (Updated February 8, 2022)

Under existing IRS procedures, refund claims that are disallowed on the basis of a timeliness determination are eligible for consideration by Appeals. However, the Appeals resolution process is not available for refund claims that are rejected on the basis that they are deficient or otherwise not processible.

Note that the IRS implemented a one-year transition period during which time taxpayers who file a claim for refund involving the Research Credit will be informed of a deficient claim for refund through Letter 6426C or 6428. The letter will indicate which of the five items of information is missing and provide the taxpayers with 45 days to perfect the filing. See FAQs 7 and 8, and the IRS Press Release for additional details. As noted in FAQ 1, the IRS continues to accept input and plans to closely monitor the process and questions during the one-year transition period to determine if any modifications are necessary. As such, comments can be sent to irs.feedback.recredit.claims@irs.gov.[6]

[1] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS webpage, Updated February 9, 2022, https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions (retrieved February 10, 2022)

[2] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS webpage, Updated February 9, 2022

[3] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS webpage, Updated February 9, 2022

[4] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS webpage, Updated February 9, 2022

[5] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS webpage, Updated February 9, 2022

[6] “Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions,” IRS webpage, Updated February 9, 2022