The Internal Revenue Service (IRS) has once again extended the transition period for taxpayers to perfect a research credit claim for refund before the IRS reaches a final decision on the claim. In a recent development, taxpayers now have until January 10, 2025, to ensure the accuracy and completeness of their claims.
This extension comes over a year after the IRS initially extended the deadline to January 10, 2024. With this new extension, taxpayers have an additional year to take necessary steps in perfecting their claims. To assist taxpayers further, the IRS's Large Business and International Division has updated its frequently asked questions (FAQ) page, offering a best practice example for submitting a claim.
The IRS has been tightening its scrutiny of research and development (R&D) tax credit claims, emphasizing the need for thorough documentation to substantiate the legitimacy of such claims. In a memorandum issued by the IRS Chief Counsel's office in 2021, specific requirements were outlined for a taxpayer's refund claim for the research credit to be deemed valid:
Identification of all business components related to the Section 41 research credit claim for the year.
Detailed listing of research activities performed for each business component, including the names of individuals involved in each activity and the specific objectives they aimed to achieve.
Disclosure of total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year, typically done using Form 6765, Credit for Increasing Research Activities.
These five pieces of information are mandatory for any research credit claim for a refund, irrespective of whether it's a formal or informal claim, as highlighted in the updated FAQ page. However, for Form 1120 taxpayers, filing an informal claim for refund for the research credit is not an option, and they must file a formal amended return.
Additionally, taxpayers must provide a declaration signed under penalty of perjury, confirming the accuracy of the information provided. In most cases, the signature on the Forms 1040X or 1120X fulfills this requirement. It's worth noting that taxpayers are encouraged to present the facts in a written statement rather than merely submitting a stack of documents. When providing documents, including a credit study, taxpayers must specify the exact page or pages supporting a particular fact. A sheer volume of documents will not suffice, as emphasized in the 2021 memo.
The updated FAQ page outlines that taxpayers can furnish the required information either as part of the explanation (e.g., Part II of the Form 1120X) or as an attachment to the claim for refund. However, the IRS will exclusively accept information provided in print or via fax and cannot accommodate information delivered through alternative means, such as portable electronic storage devices. For a comprehensive example of a perfected submission, refer to FAQ item 12 on the FAQ page.
As the IRS extends the transition period for perfecting research credit claims, taxpayers must ensure compliance with these rigorous requirements to secure the refunds they are entitled to. Staying informed and following best practices are key to navigating these evolving regulations effectively.
Note: This article is based on information from AccountingToday and is intended for informational purposes only. Be sure to consult with tax professionals or experts for personalized guidance on your specific tax situation.
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