In a new directive, LB&I-04-0320–0006, the IRS Large Business and International Division (LB&I) describes the requirements and processes for evaluating, on a centralized basis, the risks associated with potential issues related to research credits under IRC Section 41 and eligible research expenditures under IRC Section 174 (collectively, "research issues").

Effective for any new research issues identified on or after April 1, 2020, the directive applies to LB&I examinations of Industry Cases, Large Corporate Compliance cases, and all claims and amended returns. The directive, however, does not apply to Research Issues Campaign Inventory (see Tax Alert 2020-0489) or Compliance Assurance Process program cases.

The directive identifies the Research Risk Review Team (RT) as "a national strategy to improve the identification of the highest risk research issues under IRC [Sections] 41 and 174." The RT consists of subject matter experts, engineers, revenue agents, and other specialists who are to help the field employees with the identification and risk assessment of issues.

The directive outlined the following process for evaluating claims:

1. Case and specialist managers, in collaboration with the agent and specialist, complete the Issue Selection and Collaboration Process (preliminary risk analysis to select issues with the highest compliance issues).
2. The RT's review and concurrence are required if: (A) the case and specialist managers agree to examine the research issue, or (B) the case and specialist managers disagree on whether to examine the research issue.
3. The RT does not need to review and concur on the need to examine the research issue if the case and specialist managers agree not to examine the research issue.
4. The RT must be contacted for possible review and concurrence when:
• An Industry Case return does not meet the Manager Initial Risk Assessment (MIRA) and Specialist Initial Risk Assessment (SIRA) guidelines (see, IRM 4.46.3.2.1) and the case and/or specialist manager wants to examine a research issue
• A Large Corporate Compliance return is risk-assessed and the case and/or specialist manager wants to examine a research issue
• Any subsequent year and/or related return pickup has a research issue that will be examined
• Research issue claims or amended returns are received during an examination, whether informal or formal, in which the research issue will be examined
• The scope and depth of the research issue changes at any point during the examination or
• Pre-filing agreements are received and considered with a research issue

Implications

There has been a long-standing focus by the IRS on research issues and this focus is increasing. Specifically, one of the last two LB&I campaigns recently issued relates to research issues. This directive establishes how research issues are going to be risk assessed by a centralized team — the RT. These changes in how the IRS is going to look at research issues may result in more examinations and those examinations may involve a deeper dive into certain issues; however, it appears that part of the RT's role is to evaluate whether the IRS should use resources on a particular examination. For example, in a case involving the examination of a taxpayer when the case and specialist managers agree to examine the research issue, the RT could determine that the specific issues presented in the case do not warrant an examination of the research issues.

It is speculative at this point to conclude that the examinations will be better for taxpayers. Historically, IRS use of a more targeted approach on issues has resulted in more efficient examinations. Such examinations that are more targeted and focused often result in similar savings for taxpayers. However, it is too soon to tell whether this centralized risk assessment of research issues by specialists will result in examinations that reduce unwarranted effort by both the examiners and taxpayers on the research issues being examined.

EY will monitor the IRS's implementation of the directive to see whether the RT focuses on certain issues or scenarios when recommending that LB&I undertake or forego an examination of the research issues in a particular case.

———————————————