IRS Memo 20214101F - Section 41 Research Credit Refund Claims
October 27, 2021 | IRS, IRS Memo, R&D Tax Credit
On October 15th, the IRS Chief Counsel established new filing criteria for taxpayers claiming the Research & Development (“R&D”) credit in Memo 20214101F. The memo sets forth additional information to include with a research credit refund claim for the claim to be considered valid [1]. The memo states that this requirement is in accord with Section 301.6402-2 of the Treasury Regulations and will allow the Service to determine whether a refund should be paid immediately or an examination should be conducted to verify the taxpayer’s entitlement to the refund [2].
Claims for the R&D tax credit under Section 41 of the Internal Revenue Code are currently examined in a substantial number of cases and consume significant resources for both the IRS and companies claiming the credit [3] [4]. The IRS intends for Chief Counsel Memo 20214101F to improve tax administration with clearer guidelines for eligible taxpayers to claim the credit while reducing the number of disputes over such claims.
The Chief Counsel's legal advice released on October 15 was the result of ongoing efforts to manage R&D credit issues and resources in the most effective and efficient manner. By requiring companies to provide the information referenced below, the IRS intends to determine upfront if an R&D credit claim for refund should be paid immediately or whether further review is needed.
R&D Tax Credit Claim Filing Criteria
Specifically, the Chief Counsel Memo 20214101F provides that for a Section 41 research credit claim for refund to be considered a valid claim, companies are required to provide the following information at the time the refund claim is filed with the IRS [5]:
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.[6]
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.
Implementation and Next Steps
The IRS will provide a grace period [until January 10, 2022] before requiring the inclusion of this information with timely filed Section 41 research credit claims for a refund. Upon the expiration of the grace period, there will be a one-year transition period during which taxpayers will have 30 days to perfect a research credit claim for a refund prior to the IRS' final determination on the claim.
If you have any questions or concerns about this memo, please reach out to the Probity Tax Recovery team. Our team of tax experts have a solid grasp on this new requirement and we’re available to walk through it with you. We’re also available to work with your CPA or tax preparer through the filing process to make sure your return is filled with all of the required information when the time comes. While this may be a new standard, we’ve utilized the information mentioned in this memo throughout the course of each R&D study we conduct. We do this to ensure we are providing your company with the most accurate benefit possible. _________________________________________________________________________
1. Office of Chief Counsel Internal Revenue Service, Memorandum I.R.C. § 41 Research Credit Refund Claims (October 15, 2021), https://www.irs.gov/pub/irs-lafa/20214101f.pdf
2. Lockheed Martin Corp. v. United States, 210 F.3d 1366, 1371 (Fed. Cir. 2000).
3. Quarty v. United States, 170 F.3d 961, 972 (9th Cir. 1999)
4. Boddie-Noell Enterprises, Inc. v. United States, 36 Fed. Cl. 722, 728 (1996)
5. Nick's Cigarette City, Inc. v. United States, 531 F.3d 516 (7th Cir. 2008)
6. Stoller v. United States, 444 F.2d 1391 (5th Cir. 1971)