Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions

 

Introduction

Existing Treasury Regulations require that for a refund claim to be valid, it must set forth sufficient facts to apprise the IRS of the basis of the claim.  For a refund claim involving a Credit for Increasing Research Activities under I.R.C. § 41 (Research Credit) to be valid, taxpayers are required to provide the following information at the time the refund claim 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) name the individuals who performed each research activity, (4) as well as the information each individual sought to discover.

(5)  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.

Items 1 through 5 above are referred to as the “five items of information.”  See FAA20214101FPDF, published on October 15, 2021, and the IRS Press Release for additional details.  The IRS provided a grace period until January 10, 2022 before requiring the inclusion of the five items of information with timely filed 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 45 days to perfect a Research Credit claim for refund prior to the IRS' final determination on the claim. 

Guidance/Process For Including the Five Items of Information on Amended Returns

Yes, comments can continue to be sent to irs.feedback.recredit.claims@irs.gov.  The IRS plans to closely monitor the process and questions during the initial one-year transition period to determine if any modifications are necessary.  Updates will be provided on irs.gov.

If your claim for refund includes the Research Credit and other items, you must provide the five items of information.  If your claim is determined to be deficient, you will be mailed a letter providing 45 days to perfect your claim.  If the IRS does not receive your information or the missing information is insufficient, your entire claim for refund will be rejected.

The IRS will make every attempt to review Research Credit refund claims as expeditiously as possible and make determinations on such claims within 6 months of receipt.

The IRS issued Interim GuidancePDF to examiners outlining the procedures for Research Credit refund claim validity determinations. For taxpayers not under examination, Campus employees will review the claim for refund for the five items of information in coordination with a group of subject matter experts and Division Counsel.  For taxpayers under examination, the field examiner will review the claim for refund for the five items of information in coordination with a group of subject matter experts and Division Counsel.

During the transition period, taxpayers 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 are missing and provide 45 days to perfect the filing.

The term “perfecting” means taxpayers are given an opportunity to provide  missing information that is required to process the Research Credit refund claim.  During the transition period, taxpayers will be notified of a deficient claim and provided 45 days to perfect.  This date by which a taxpayer must provide the missing information will be on the letter sent to taxpayers.

You may provide the required information as part of the explanation (for example, Part II of the Form 1120X) or as attachment to the claim for refund.  The IRS can only accept information provided on paper or submitted through facsimile. The IRS cannot accept information provided through other forms, such as portable electronic storage devices. See FAQ 12.

In lieu of specific names, a taxpayer may identify the individuals who performed each research activity by listing the title or position of each individual.  Information may be aggregated as described in FAQ 11 but must identify the specific number of individuals and each individual’s title or position.  Note that taxpayers may be asked to provide specific names upon substantive review of the claim.

Yes.  If you have a group of individuals who performed research activities and sought to discover the same information for a business component, then you may list all employees by name or title/position for that one business component and describe the information they sought to discover.

The correspondence requesting missing information necessary to perfect a claim will provide a fax number.  Faxing is the best way to provide this information to the IRS.  You may also provide the information in the mail.  Be sure to include the requested information to perfect your claim for refund involving the Research Credit issue and the copy of the letter sent to you.

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. 

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).

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.

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.

 

Special Circumstances

Yes, the five items of information are required for any Research Credit claim for refund – whether formal or informal.  Note, however, that Form 1120 taxpayers cannot file an informal claim for refund for the Research Credit and must file a formal amended return for any Research Credit claim for refund.  See Notice 2008-39PDF.​​​

Revenue Procedure 2011-42PDF provides guidance to taxpayers on using statistical sampling.  If taxpayers utilize a statistical sample to compute their Research Credit, the documentation for all units in the sample must contain the first four items of information referenced in FAA20214101FPDF and be provided with the claim for refund.  Taxpayers utilizing a statistical sample to compute their Research Credit are still required to provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses, as computed pursuant to Rev. Proc. 2011-42, for the claim year with the claim for refund.

Information can be found at “About Form 6765, Credit for Increasing Research Activities” webpage.  Also, IRS anticipates updating these FAQs periodically with additional information as needed.