IRS relaxes R&D tax credit refund claim requirements

The Internal Revenue Service is easing the rules for claiming a tax refund tied to a claim for the research and development tax credit.

The IRS announced Tuesday that for claims postmarked as of June 18, 2024, it’s waiving the requirement that taxpayers provide the following two items of information with their refund claim involving the Research Credit: 

1.  The names of the individuals who performed each research activity, and
2.  The information each individual sought to discover. 

The IRS said it’s making the change after significant experience with the Research Credit refund claims process. While the IRS is waiving the requirement of providing these two items of information at the time a refund claim involving the Research Credit is filed with the agency, the information may still be requested if a refund claim involving the Research Credit is selected for examination. In FAQ 21, it noted that taxpayers are still required to provide the following information at the time the refund claim involving the Research Credit is filed with the IRS:

1. Identify all the business components to which the Section 41 research credit claim relates for that year.
2. For each business component, identify all research activities performed and
3. 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.

The agency has been hearing complaints about the documentation requirements in recent years after the IRS Chief Counsel’s office issued a memorandum in 2021 saying it wants more detailed information about all the business components for which the research credit claims relate for that year. For each business component, companies needed to identify all the research activities they had performed and name the individuals who performed each research activity, along with the information each individual sought to discover.. The claims also needed to detail the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.

The Chief Counsel memorandum came in response to questions from IRS officials in the Large Business & International division and the Small Business/Self-Employed division about what information taxpayers should provide with their claims for refunds or tax credits, what format they should use, and how the statute of limitations applies. The research credit, also known as the research and experimentation (R&E), or research and development (R&D), tax credit has been used since 1981 by companies and is supposed to incentivize innovation by companies. However, the tax credit has also been exploited by taxpayers who have claimed the R&D credit for doing little in the way of innovation, and it often appears on the IRS’s annual list of the “Dirty Dozen” tax scams.

The IRS has twice extended the amount of time it has given taxpayers to “perfect” an R&D tax credit claim to meet the proper documentation requirements. Last fall, taxpayers were given until Jan. 10, 2025 to perfect their claims.