Enacted in 1981, the research and development tax credit rewards companies for investing in innovation and growth. If you’re only now getting acquainted with the R&D credit, you may find one of its perks to be especially appealing: You can retroactively claim it on prior years’ tax returns (up to three years).
Requesting an R&D refund is typically a straightforward endeavor. You simply amend your returns with the requisite forms and supporting documentation. As of late, however, the IRS has changed their position on what constitutes valid documentation, potentially making the process more arduous.
If you’re planning to request an R&D refund for prior years, here’s what you should know.
The previous standard
The IRS has always been more aggressive about adjusting amended R&D claims than timely filed R&D claims. But even so, they have at least allowed these amended claims “in the door” and, for the returns they audit, allowed the taxpayer to debate with them over how much credit should be allowed.
New IRS position for amended returns
Recently, the IRS issued a memo that sets forth a laundry list of criteria that must be included in a refund claim. If the IRS decides that the taxpayer has not fully completed the laundry list, they will take the position that the claim is invalid and refuse to accept the return into their system. This would effectively disallow 100% of the claim.
What information are they requesting?
Most of the information they are requesting would ordinarily be provided in an R&D Study already. But a new item they are asking for is potentially burdensome: they are asking the taxpayer to provide, for each research project: “all of the information each individual sought to discover”. Taken to the extreme, providing “all” of this information could be a monumental undertaking and make the exercise cost prohibitive.
What if I don’t provide “all” of the information?
In theory, the IRS’s new position gives them the power to disallow any claim that they feel is too summarized, too general, etc. But will they actually do so? Many R&D experts believe that the IRS is simply trying to provide themselves with an “easy out” to disqualify the most abusive claims, and that as long as taxpayers make a good faith effort to comply within reason, that refund claims will at least be admitted into the system. From there, they could still be audited, but that is familiar territory.
Is this a law change?
No, the law has not changed. The IRS has simply taken a more aggressive position on their interpretation off the law. Time will tell whether their new position will withstand the scrutiny of the courts and Congress, either of whom could intervene and force the IRS to change their position.
What should you do today?
If you’re considering an R&D refund request, we’re here to help. Our R&D tax credit advisors are closely monitoring the situation and prepared to advise you on next steps, so you can make the most of this tax benefit.
Contact your Froehling Anderson representative or Jeff Holmberg to learn more.
