Published on November 5th, 2022

Documentation requirements for refund claims involving the Sec. 41 business tax credit for increasing research activities that the IRS imposed last fall impose undue taxpayer burdens and deviate from Treasury regulations and other authoritative guidance, the AICPA said in a comment letter dated Sept. 21.

The letter, signed by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee to IRS and Treasury officials, expands upon the AICPA's Nov. 18, 2021, letter that expressed initial concerns and provided broad comments on the requirements.

The IRS outlined the requirements in a Field Attorney Advice memo and news release both publicly issued on Oct. 15, 2021.

In late November 2021, Holly Paz, deputy commissioner of the IRS Large Business and International Division, told an AICPA volunteer member committee that the requirements apply only to claims of the R&D credit on amended returns and that the Service deemed them necessary for such claims to meet the existing requirement of Regs. Sec. 301.6402-2(b)(1) that taxpayers provide sufficient information regarding the grounds and facts upon which a refund claim is based, known as the specificity requirement. The memo also states that the requirements must be met for a refund claim of an R&D credit to be considered valid as a threshold matter.

But in the comment letters, the AICPA contended that the requirements represent a new collection of information, one that "is highly burdensome and presents a great deviation from the existing regulations, binding and authoritative guidance, and amended return form and instructions." If the IRS chooses to retain such requirements, the Sept. 21 letter stated, it should adopt the letter's three main recommendations: (1) the requirements should not impose the significant burden represented in the memo; (2) the IRS should clarify essential information needed to meet the requirements; and (3) the IRS should consider each item in a refund claim, including any unrelated to an R&D credit but included with it, and inform taxpayers within 45 days whether the claim is valid.

Ease Significant Burdens

The letter stated that the requirements pertain to a taxpayer's entire R&D credit, not just an additional credit amount claimed on an amended return, which makes them overly broad to a point "tantamount to being punitive." In addition, a high volume of R&D activities for some taxpayers could entail "many hundreds of pages of information" difficult for these taxpayers to compile and the IRS to review.

At the other end of the scale, small and midsize taxpayers might be deterred "from claiming research credits they are rightly entitled to," the AICPA said. "These taxpayers may not be able to pursue valid research credit claims, based upon the upfront resource needs of doing so and the potential litigation costs if claims are rejected, a more likely result given the [memo]."

Clarify Essential Information

The AICPA criticized some of the memo's requirements as unclear and overly broad, such as some points pertaining to the general requirements that the claim identify all research activities performed, all individuals who performed them, and all information each individual sought to discover.

"Preparing a comprehensive list of 'ALL' information is not feasible because 'all' is an undefined term," with the result that taxpayers have little way of knowing how much information is needed, the letter stated. Also, the word "discover" "is not in the statute or regulations," the letter stated. The AICPA recommended clarifying these requirements, including with examples and acceptable formats.

Evaluate Each Item Independently

In the case of a refund claim included on a single amended return that is attributable to additional R&D credits being claimed, as well as other items, the AICPA recommends that the IRS evaluate and consider each item included in a refund claim independently based upon the facts, circumstances, and the law related to each separate item. Also, the memo states that the IRS will notify taxpayers whose claim it considers invalid for not meeting the requirements, allowing them 45 days to perfect it. By the same token, the AICPA said in the letter, the IRS should be bound by a decision date of no more than 45 days to inform taxpayers whether their claim is valid.

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