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: Identify all the business components to which the Section 41 research credit claim relates for that year. For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover. 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, a one-year transition period was granted and subsequently extended for an additional two years (through January 10, 2025) 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 1. Will the IRS continue to accept input from taxpayers and representatives on the requirements? 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. 2. Will the five items of information required to be provided with a claim for refund involving the Research Credit apply to refund claims postmarked before January 10, 2022? No. 3. Will the IRS review each Research Credit claim for refund to determine whether it is valid? Yes. 4. What will happen if my Amended Return contains the Research Credit and other items? If your amended return does not include a claim for refund (even if it contains the Research Credit) or does not request an adjustment to the Research Credit claimed on your original return (even if it does include a claim for refund not involving the Research Credit), the five items of information are not required to be provided with your amended return. The IRS may, however, later require you to provide the five items of information to substantiate your entitlement to the Research Credit, if your return is selected for examination. If your amended return includes a claim for refund related to the Research Credit (even if it contains other items), you are required to provide the five items of information with your amended return. If the IRS determines your claim for refund is deficient, for the one-year transition period, you will be mailed a letter providing you 45 days to perfect your claim for refund. If after the 45-day period, the IRS does not receive the missing information or if the IRS determines any additional information provided is insufficient, your entire claim for refund will be rejected. 5. How long will it take the IRS to process a claim for refund involving the Research Credit? 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. 6. What instructions are going to be provided to examiners who receive claims for refund involving the Research Credit? 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. 7. Will taxpayers receive notification if the IRS receives a Research Credit refund claim that it believes is deficient? (Updated October 30, 2023) 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. Please note that an original submission or a subsequent response which only repeats the research credit legal definitions and requirements under the Internal Revenue Code or Treasury Regulations will be deemed insufficient to satisfy the requirement to provide the five items of information. See Best Practice Example Submission. 8. What is meant by “perfecting” a claim for refund? 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. 9. In what format should I provide my initial response to the IRS? (Updated October 30, 2023) 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 and Best Practice Example Submission. 10. Is there an alternative method to identify individuals who performed each research activity in lieu of providing the first and last name of each person? 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. 11. If a group of individuals worked together on research activities to seek the same information, can I list all the employees together? 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. 12. What is the preferred method for providing missing information to perfect a deficient claim for refund involving the Research Credit? 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. 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) 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). 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 FAQ13. 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. Special Circumstances 16. Are there different procedures for determining the validity of claims for refunds that are over the Joint Committee threshold? No. 17. Are the five items of information required for informal claims for refund of the Research Credit? (Updated October 30, 2023) 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. 18. What information do I need to provide if I am using a statistical sample to determine my Research Credit? 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. 19. Where should I look to find what information is required for an amended claim for refund involving the Research Credit? 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. 20. Best Practice Example Submission for Five Items of Information Best Practice Example Submission for Five Items of Information for Research Credit claims for refund (all job titles, descriptions, and other information shown below are fictional. They are being used for illustrative purposes only): Identify all business components to which the IRC Section 41 research credit claim for refund relates for the claim year. Business Component Number Business Component Name IRC Section 41(D)(2)(B) Category 1 Alpha Software Suite Computer Software 2 Beta Manufacturing Line Process 3 Gamma Widget Product 4 Delta Coating Formula Identify all research activities performed by business component. Alpha Software Suite Taxpayer sought to improve the performance and quality of its inventory and process tracking systems. The research performed included: Integrate Radio Frequency Identification (RFID) part tracking with factory process tracking software and accounting software, all currently residing on different software platforms. Develop real-time reporting from above software systems so end users can track product through the facility. This requires database development from currently disparate systems. Beta Manufacturing Line Newly designed line to improve throughput and quality of Beta widgets. The research performed included: Design new manufacturing equipment capable of higher throughput by designing and building higher speed injector process that is also capable of meeting tighter tolerances due to the mold wall design of withstanding temperatures without expanding. Integrate all of the new manufacturing equipment into a new production line with redesigned conveyors and automated material handling capable of increasing throughput. The challenges came in reducing jams in the line and damage of widgets. Develop a software handshake between new components; the new components were not originally designed to share data with one another. A piece of equipment known as a “communication doodad” was added to the system, and a section of code was developed allowing the doodad to translate and pass data from one system to the next. Gamma Widget A newly designed widget for the Gamma industry and product line. The research performed included: Design widgets needed for the Gamma industry. Due to the extreme conditions in this industry, widgets need added strength, while not increasing their weight. Various materials, internal structural supports and wall thicknesses were tested in various combinations. Test to determine which materials would be best suited for the extreme industry conditions were performed. Components were manufactured in several different proposed materials, then placed in a test chamber that mimics the conditions these parts would be subjected to on an accelerated timeline. After the testing period, the parts were removed and inspected for how well they held up to the industry conditions. Destructive testing was performed on the trial parts after visual inspection. The destructive testing allowed Gamma widget team to determine how deep the corrosive effects of the test environment penetrated the part. Delta Coating A newly formulated coating for widgets to prevent corrosion under extreme conditions. The research performed included: The protective coating was developed in our laboratory and is a new formulation. Various additives and proportions were combined and tested under extreme temperature and pressure conditions to ensure the widgets did not corrode, ensuring their effectiveness in the field is maintained. Identify all individuals who performed each research activity by business component, and Describe all the activities and information each individual sought to discover by business component. Business Component Number Job Title Qualified Service Category Activities and Information Each Individual Sought to Discover by Business Component 1 Software Developer Qualified Research Developed functional requirements, coding of software, and testing in facility. Integrate data from disparate systems by researching alternatives. 1 Engineering Manager Direct Supervision Direct supervisor of Software Developer and Project Engineer. 1 Project Engineer Qualified Research Hardware and peripheral development in the facility to work hand-in-hand with software tracking. Experimented with multiple RFID readers and chips. Experimented with RFID chip location on parts and readers in the plant to maximize successful reading of chip. 2 Project Engineer Qualified Research Designed manufacturing equipment including and tested capabilities with several different higher speed injectors. 2 Software Developer Qualified Research Programmed logic controllers for the conveyor and automated material handling systems. 3 Project Engineer Qualified Research Designed internal structure and led testing of the iterative designs. 3 Metallurgist Qualified Research Worked on development of material(s) to withstand extreme conditions. 4 Lab Technician Direct Support Compiled test data for Chemical Engineer. 4 Chemical Engineer Qualified Research Developed formulations to test in extreme environments. 4 Lab Manager Direct Supervision Direct supervisor of Lab Technician and Lab Manager. Include Form 6765 or provide the total amount of each qualified expense type: wages, supplies, and contract research. FY 2019 Qualified Research Expenditures (QREs) Original Return Additional Claim Amounts Totals Wages $20 $1 $21 Supplies $1 $14 $15 Rental and Lease of Computers $0 $0 $0 Contract Research at 65% $15 $5 $20 Total QREs $36 $20 $56
