The IRS Large Business and International (LB&I) division has issued interim guidance (LB&I-04-0122-0001, or the Memorandum) and frequently asked questions (FAQs) on applying Field Advice 20214101F to refund claims that include a claim for credit for increasing research activities (research credit claim) and procedures for determining whether a refund claim is valid. The Memorandum mostly consists of additional or modified provisions in the Internal Revenue Manual. See the EY Tax Alert for more information on Field Advice 20214101F.

Validity of refund claims that include a research credit claim

Consistent with Field Advice 20214101F, the Memorandum and FAQs require taxpayers to submit the following five items of information when filing a refund claim that includes a research credit claim:

1. The identity of all the business components that form the factual basis of the IRC Section 41 research credit claim
2. A description of all research activities performed, by business component
3. A list, table or narrative that provides the names of all the individuals who performed each research activity, by business component
4. A list, table or narrative that provides all the information each individual sought to discover, by business component
5. The total qualified employee wage expenses, supply expenses and contract research expenses

According to the FAQs, these five items of information are not required for refund claims postmarked before January 10, 2022.

The FAQs indicate that a taxpayer may identify the individuals who performed each research activity by listing the title or position of each individual, instead of the specific names. The IRS also will allow taxpayers to aggregate information, but FAQ 10 states that taxpayers must still identify the number of individuals and their titles or positions. Further, taxpayers may be asked to provide specific names upon substantive review of the claim.

FAQ 15 addresses the five items of information in the context of statistical sampling. If a taxpayer utilizes a statistical sample in computing its research credit, the documentation for all units in the sample must (1) contain the first four items of information, and (2) be provided with the claim for refund. Taxpayers utilizing a statistical sample to compute their research credit must still provide, with the claim for refund, the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses, as computed under Revenue Procedure 2011-42, for the claim year.

Transition period and time to perfect

For refund claims that include a research credit claim filed from January 10, 2022 through January 9, 2023 (the transition period), taxpayers will have 45 days to perfect a claim that is timely filed but does not have the five items of information indicated previously. As explained in FAQ 8, perfecting a claim means the taxpayer provides the missing information. Generally, a taxpayer must file a credit or refund claim within three years of the time the return was filed or two years from the time the tax was paid, whichever is later. A refund claim that includes a research credit claim that is timely filed but missing the five items of required information will be considered timely filed during the transition period if the refund claim is perfected within 45 days.

LB&I will notify taxpayers that they failed to submit the required information with Letter 6428, "Claim for Credit for Increasing Research Credit Activities — Additional Information Required." Taxpayers will have 45 days from the date Letter 6428 is issued to submit the information. Taxpayers must submit any facts and statements with a written declaration stating that the information is accurate, and they must sign the written declaration under penalties of perjury.

Claims filed during transition period

For claims filed during the transition period, the Memorandum states that LB&I examiners will generally have 30 days to evaluate whether the claim has the five pieces of required information and verify that the claim is signed under penalties of perjury. If a claim is valid, the Memorandum advises examiners to follow the appropriate risking procedures and to determine whether an examination of the claim is needed. However, the FAQs state that the "IRS will make every attempt to review [r]esearch [c]redit refund claims as expeditiously as possible and make determinations on such claims within [six] months of receipt."

If a claim is deficient, the Memorandum states that the examiner will issue Letter 6428 and continue the exam under the normal risking procedures if the information is received within 45 days. If the information isn't received, the examiner will issue Letter 6430, "No Consideration, Section 41 Claim." If the claim is deficient, the Memorandum advises the examiner to not consider the claim issues or include claim language in a report. The entire refund claim will be rejected.

Claims filed after transition period

Taxpayers that file claims after the transition period will not have an opportunity to perfect them. The Memorandum advises examiners to use the following procedure for claims filed on or after January 10, 2023:

1. Determine within 30 days whether the claim is valid by evaluating whether all five pieces of information are submitted, and the claim is signed under penalties of perjury
2. Follow the appropriate risking procedure if the claim is valid
3. Issue Letter 6430 if the claim is deficient
4. Do not consider the claim issues or include claim language in a report if the claim is deficient

The Memorandum, in the form of Internal Revenue Manual provisions, directs the examiner to obtain the concurrence of both the territory manager and IRS counsel that the claim is deficient before issuing the Letter 6430 indicating the IRS will not consider the claim.

Other provisions

The Memorandum also includes guidance if a refund claim that includes a research credit claim bypasses campus classification (e.g., a Form 1040X given directly to an examiner during an audit). An LB&I examination group that receives a research credit claim that bypassed campus classification must follow the same procedures for determining if a claim is valid as described previously. If a Small Business/Self-Employment examination group receives a research credit claim that bypassed campus classification, however, the Memorandum establishes a separate set of procedures for that group to follow to determine whether the claim is valid or deficient.

According to the FAQs, the IRS will continue to receive comments from taxpayers and representatives on the requirements at irs.feedback.recredit.claims@irs.gov. The IRS states that it plans to closely monitor the process and questions during the initial one-year transition period to determine if any modifications are necessary.

Implications

The Memorandum and FAQs do not significantly modify the guidance in Field Advice 20214101F, but do provide clarification on a few significant points. First, the Memorandum specifies that a credit refund claim should be reviewed for compliance with the informational requirements of the Field Advice within 30 days of receipt. One of the many concerns taxpayers have had with the Field Advice is whether the claim review would be a lengthy process, particularly if the claim for refund was submitted close to the statutory deadline, as a deficient claim may not be amended or perfected after the IRS rejects it on procedural grounds, once the statute of limitations for claiming a refund has passed.

An FAQ also addresses timing of review, but is worded somewhat ambiguously. FAQ 5 asks how long it will take the IRS "to process a claim for refund involving the Research Credit." The answer is the "IRS will make every attempt to review Research Credit refund claims as expeditiously as possible and make determinations on such claims within [six] months of receipt." This could be interpreted to mean that the preliminary review of claim validity could take up to six months. However, this would directly conflict with the Memorandum, which states that this initial review takes just 30 days. The better interpretation appears to be that it could take up to six months in total to issue a refund after receiving the taxpayer's claim, which would encompass the initial 30-day period for reviewing the validity of the claim under the Memorandum. Further, this six-month period for issuing a refund is consistent with the general rule in IRC Section 6532 permitting a taxpayer to file suit for refund only after six months has passed from the time it filed the claim for refund (if not decided upon earlier).

Additionally, the FAQs clarify the interplay between the requirements of the Field Advice and the use of statistical sampling as permitted by Revenue Procedure 2011-42. As such, taxpayers who compute their research credits using statistical sampling will be required to provide the requisite information only for the sampled items (other than total qualified employee wage expenses, supply expenses and contract research expenses, which will be extrapolated from the sample and would already have been reported on the Form 6765 included with the refund claim). While still a burdensome requirement, many taxpayers would much prefer to only list the business components relevant to sampled items when filing a claim, versus all of the business components, as required if sampling is not used.

A taxpayer now has 45 days (up from 30 days as first stated in the IRS News Release accompanying the Field Advice) to respond to an IRS letter notifying the taxpayer that the refund claim is deficient. The additional time to respond is certainly welcome, especially given the potential difficulty in gathering the newly required information.

The Memorandum's direction that agents get the concurrence of both a territory manager and IRS counsel means that it will take the IRS some time to coordinate issuance of the Letter 6430 but the letter will have broad support when issued. Additionally, the issuance of the Letter 6430 by the IRS may provide some time to perfect a deficient claim if the statute of limitations for claims will permit a new claim to be filed.

Not all taxpayer questions were answered by the FAQs, and it remains to be seen whether the FAQ list will expand over the coming months as taxpayers begin filing claims for refund that fall under the new guidance.

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