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Understanding IRS’s New Requirements for R&D Tax Claim

[vc_row bg_type=”bg_color” bg_color_value=”#f5f5f5″][vc_column][vc_column_text]by alliantgroup staff,
December 08, 2021[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]In an attempt to finetune the verification process for R&D tax credit, the IRS has decided to introduce some new requirements for information from businesses availing the claim. In a recent Chief Counsel memorandum, the agency stated that it wants more detailed information about all of the business components for the claims made for that year.

What’s new?

The new information requirements pertain to the research credit claim’s business components, activities, and costs. For a claim to be valid, taxpayers need to provide the following:

  • Companies must identify all the business components to which the R&D tax credit can be applied that year;
  • Identify all research activities they’ve conducted and name the individuals who led each research activity, as well as the information each individual sought to discover; and
  • Identify the total qualified employee pay expenditures, total qualified supply expenses, and total qualified contract research expenses for the claim year. You can do this by using Form 6765 (Credit for Increasing Research Activities).

The Memorandum responded to inquiries from IRS officials from the Large Business and International Division and the Small Business/Self-Employed Division. While the initial query was regarding the nature of the information submitted for the R&D tax claim, officials also raised a requirement for clarification on the submission format and limitations.

IRS’s attempts to curb confusion

The R&D credit gives U.S. businesses chance to boost innovation and research for growth and progress. But over the years, some have tried to exploit unpaid credits without doing any R&D work. This new guidance is the IRS’s attempt to minimize confusion and streamline administration by making the instructions explicit. This new set of rules can also help them in determining if an exam is essential for a particular claim or not.

The IRS receives thousands of R&D claims for credits amounting to hundreds of millions of dollars from companies, businesses, and individual taxpayers. Hence, it’s natural that the claims under Section 41 get a thorough examination, using a notable amount of time and resources from the IRS and taxpayers. The new guidelines are issued to help handle research credit concerns and resources more efficiently. This way, the IRS will be better equipped to evaluate whether an R&D tax credit claim for refund should be paid promptly or if more investigation is required by asking taxpayers to supply the additional information.

The IRS will be providing a grace period until January 10, 2022, before making it mandatory to include this new information in any R&D tax credit claim. Following the grace period, there will be a one-year transition period where taxpayers will get 30 days to improve their claims before the IRS passes a final judgment.

What should Businesses and Firms do?

Businesses and firms claiming the R&D tax credit shouldn’t be discouraged now that IRS has added some more requirements. In fact, it’s a standard procedure of IRS to update the credit process every few years. For advisors and CPA firms, it’s imperative that they revisit their credit filing process and update them for accuracy in accordance to the new requirements.

Here’s where alliantgroup is way ahead of everyone. Our tax filing processes already conform with IRS’s new requirements. Our teams consists of ex-IRS Commissioners who have helped us develop and finetune our services to adhere to the latest tax developments. In fact, if you’re one of alliantgroup’s clients, this shift would not put any roadblocks in your way of availing the R&D tax credit. We’ll be handling it all, with no extra time or effort from your end.

As the industry leader on tax credits and incentives, alliantgroup wants to make sure CPA firms can handle the new requirements. Watch this on-demand video where our Strategic Advisory Board explains more about the latest update.