Does Latest IRS Guidance Signal New Firm Stance on Research Credit Refund Claims?

On October 15, 2021, the Internal Revenue Service (IRS) issued a press release related to required information for valid research credit refund claims. The press release contains a link to a memorandum by two IRS employees, which will be used to evaluate such claims, and states that there will be a grace period (until January 10, 2022) before such information will be required to be included with timely filed research credit refund claims.

The guidance referred to in the press release is from the IRS’s Office of the Chief Counsel, Memorandum 20214101F (the IRS Research Memo) dated September 17, 2021, which focuses on administrative claims for refunds respect to the Internal Revenue Code (IRS) section 41 research credit.

First, we recommend reviewing the IRS Research Memo because it does a good job explaining the necessary elements to claim the credit. Second, the IRS Research Memo is a good reminder that the first requirement is to file a refund claim that is sufficiently detailed in order to give the IRS notice on both the technical and factual basis of the refund claim. In the context of the IRC Section 41 credit, the IRS Research Memo provides the following as minimum requirements for a refund claim:

  • Identify all the business components to which the IRC Section 41 research credit claim relates for the year for which a refund is sought.
  • For each business component:
    • Identify all research activities performed
    • Identify all individuals who performed each research activity
    • Identify all the information each individual sought to discover
  • 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).
  • The refund claim must be signed under penalties of perjury attesting to the veracity of the facts and information stated therein.
  • Supporting facts should be in the form of a written statement and merely incorporated by reference to documents attached to the claim.
  • The refund claim must be filed within the period of limitations stated in IRC Section 6511. Typically, taxpayers must file a valid claim within three years of the date Form 1040 or Form 1120 was filed or two years from the time the tax was paid—whichever period expires later.

Importantly, the IRS Research Memo does not advise taxpayers on how much information the IRS believes is sufficient to make a valid claim for refund. The IRS Research Memo does, however, highlight some recent court decisions where taxpayers were denied a refund because they did not include sufficient facts in their IRC Section 41 refund claim. In those cases, the courts ruled that the refund claims were defective and untimely.

Practice Point: The IRS Research Memo is a good reminder that when it comes to refund claims, generally, more description and detail is better. Interestingly, if the taxpayer had claimed a research credit on the original return, there would be [...]

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Weekly IRS Roundup October 11 – October 15, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 11, 2021 – October 15, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

October 12, 2021: The IRS released a notice, announcing that the US Department of the Treasury (Treasury) and the IRS intend to amend the regulations under Section 987 to defer the applicability date of certain final regulations by one additional year. The deferred regulations will apply to tax years beginning after December 7, 2022. For calendar year taxpayers, the 2016 final regulations and the related 2019 final regulations will apply to the tax year beginning on January 1, 2023. The IRS and Treasury do not intend to amend the applicability date of Treasury Regulation § 1.987-12.

October 13, 2021: The IRS published an updated Form W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)) and related instructions.

October 14, 2021: The IRS and Treasury published a notice and request for comments concerning assumption of partner liabilities. The rules relate to a partnership’s assumption of certain fixed and contingent obligations in connection with the issuance of a partnership interest, as well as to Section 358(h) for assumptions of liabilities by corporations from partners and partnerships and temporary regulations concerning the assumption of certain liabilities under Section 358(h). Written comments are due on or before December 13, 2021.

October 14, 2021: The IRS and Treasury published a notice and request for comments concerning Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship). Written comments are due on or before December 13, 2021.

October 14, 2021: The IRS and Treasury published a notice and request for comments concerning Revenue Procedure 99-50, which permits combined information reporting by a successor business entity (i.e., a corporation, partnership or sole proprietorship) in certain situations following a merger or an acquisition. Written comments are due on or before December 13, 2021.

October 15, 2021: The IRS published draft instructions for Form 8949 (Sales and Other Dispositions of Capital Assets). The updated form reflects reporting for Section 1061, which concerns recharacterizing certain long-term capital gains of a partner who holds one or more applicable partnership interests as short-term capital gains.

October 15, 2021: The IRS published a news release, updating its process for certain frequently asked questions (FAQs) on newly-enacted tax legislation. The IRS is updating this process to address concerns regarding transparency and the potential impact on taxpayers when the FAQs are updated or revised. The IRS is also addressing concerns regarding the potential application of penalties to taxpayers who rely on FAQs by providing clarity as to their ability to rely on FAQs for penalty protection. The IRS stated that significant FAQs on newly-enacted [...]

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IRS Provides Guidance on Reliance of FAQs for Penalty Protection Purposes

On October 15, 2021, the Internal Revenue Service (IRS) issued a news release and fact sheet for IRS Frequently Asked Questions (FAQs), which are typically posted on the IRS’s website. The purpose of the fact sheet is to confirm and explain the extent to which FAQs can be relied upon for purposes of avoiding civil tax penalties. (For a primer on penalties and defenses, see our prior article in the Tax Executive.)

The Internal Revenue Code and Treasury Regulations, along with relevant case law, provide rules on what can (and cannot) be relied upon for penalty protection purposes. The most common penalty defenses are reasonable basis (sometimes coupled with a disclosure requirement), substantial authority and reasonable cause. Substantial authority is an objective standard, and Treasury Regulation § 1.6662-4(d)(3)(i) contains a laundry list of such authorities. Absent from this list are IRS FAQs. Reasonable basis has generally been viewed as an objective standard as well (at least outside the US Court of Appeals for the Eighth Circuit), and satisfaction of the substantial authority standard suffices for reasonable basis purposes. Reasonable cause is a subjective standard based on consideration of all the facts and circumstances, with the most important factor being the extent to which the taxpayer took steps to determine their proper tax liability.

For many years, taxpayers and practitioners have debated the value of IRS FAQs. On the one hand, they provide much needed guidance that can be helpful to taxpayers. On the other hand, FAQs are not published in the Internal Revenue Bulletin, are not treated as precedential or binding on the IRS and may be removed or changed by the IRS at any time (without any repository available to find prior versions of FAQs). The IRS relies heavily on FAQs to provide immediate guidance to taxpayers—sometimes in the form of substantive guidance—but has historically disclaimed any ability for taxpayers to rely on its FAQs or for IRS personnel to follow its FAQs. This has led to uncertainty in the tax community as to whether (and to what extent) taxpayers can and should follow IRS FAQs for both substantive positions and penalty protection purposes.

Prior to his return to private practice earlier this year, former IRS Chief Counsel Michael Desmond noted the need for better transparency and permanency around certain IRS FAQs. That transparency and permanency has finally arrived, although the weight of its value still remains uncertain. In the new release and fact sheet, the IRS announced as follows:

FAQs are a valuable alternative to guidance published in the Bulletin because they allow the IRS to more quickly communicate information to the public on topics of frequent inquiry and general applicability. FAQs typically provide responses to general inquiries rather than applying the law to taxpayer-specific facts and may not reflect various special rules or exceptions that could apply in any particular case. FAQs that have not been published in the Bulletin will not [...]

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Weekly IRS Roundup October 4 – October 8, 2021

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of October 4, 2021 – October 8, 2021. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

October 4, 2021: The IRS released a practice unit, providing tax law and audit steps for reviewing a reseller’s uniform capitalization cost computations under section 263A. The practice unit focuses on the simplified production method and does not cover the final section 263A Treasury Regulations that were effective November 20, 2018.

October 4, 2021: The IRS published a news release, announcing 18 self-study seminars available online through the IRS Nationwide Tax Forums. The seminars cover topics such as the gig economy and virtual currency.

October 4, 2021: The IRS published instructions for Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) concerning:

  • Guidance under section 1446(f) (withholding on partnership interest dispositions)
  • New lines 6a and 6b (addressing foreign tax ID number (FTIN) matters)
  • Tax treaty benefits claims (requiring representations)
  • Section 6050Y reporting (covering life insurance contracts and reportable death benefits)
  • Electronic signatures (updated to reflect new guidance)

October 5, 2021: The IRS published a news release, announcing that Free File remains available through October 15 for taxpayers who still need to file their 2020 tax returns. Free File is the IRS’s public-private partnership with tax preparation software industry leaders to provide their brand name products for free.

October 5, 2021: The IRS released a memorandum, expanding the criteria for collection due process cases that qualify for a rapid response appeals process under IRM 8.22.6.2 and related subsections.

October 5, 2021: The IRS released a memorandum concerning interim guidance regarding the IRS Independent Office of Appeals’ steps and procedures for its nationwide pilot program: The Appeals Electronic Case Files Initiative for Large Business & International (LB&I) report generation software (RGS) examination cases. This guidance is applicable to LB&I RGS International Individual Compliance cases only and excludes other large cases such as Tax Equity and Fiscal Responsibility Act of 1982 cases, Bipartisan Budget Act of 2015 cases and Syndicated Conservation Easement cases.

October 5, 2021: The IRS released a memorandum updating procedures where an organization requests a change in a section 501 subsection during the application process by submitting one application form to replace a different application form. The procedures are effective 30 days after issuance of the memorandum and supersedes those in TEGE-07-0421-0010 (April 29, 2021).

October 7, 2021: The IRS published a program letter indicating that, in Fiscal Year 2022, Tax Exempt (TE)/Government Entities (GE) commissioners expect to invest in new resources to expand outreach to the exempt sector as well as increase their enforcement staff.

October 8, 2021: The IRS released its weekly list of written [...]

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Supreme Court Grants Certiorari in One Tax Case, Denies it in Several Others

Historically, the Supreme Court of the United States rarely grants petitions for certiorari in tax cases, and it appears this trend continues in the current term.

On September 30, 2021, the Supreme Court granted the petition for certiorari in Boechler, P.C. v. Commissioner. The case presents the question of whether Internal Revenue Code Section 6330(d)(1), which establishes a 30-day time limit for filing a petition in the US Tax Court to review a notice of determination by the Internal Revenue Service (IRS) in a collection due process matter, is a jurisdictional requirement or a claim-processing rule subject to the equitable tolling doctrine.

On October 4, 2021, the Supreme Court denied petitions for certiorari in Healthcare Distribution Alliance v. James and Taylor Lohmeyer Law Firm PLLC v. United States. The former involved a challenge to a US Court of Appeals for the Second Circuit decision that held that an opioid stewardship surcharge was a tax within the meaning of the Tax Injunction Act. The Court also found that the district court lacked subject matter jurisdiction to rule on the challenge to the payment. The latter case involved a law firm’s challenge to the US Court of Appeals for the Fifth Circuit’s decision that the IRS could use a “John Doe” summons to seek the identifies of taxpayers who it believed may have taken the firm’s advice to hide income offshore.

The Supreme Court also denied petitions for certiorari in the following cases:

  • Perkins v. Commissioner: A case regarding the taxability of income derived from the sale of land and gravel mined from treaty-protected land by an enrolled member of the Seneca Nation
  • Kimble v. United States: A case focused on Report of Foreign Bank and Financial Accounts penalties and
  • Razzouk v. United States: A case involving restitution for tax and bribery convictions

Still pending are petitions in Willis v. United States (which involves the value of collectible coins seized by the government and deposited into an IRS account) and Clay v. Commissioner (which deals with a dispute over whether to follow guidance from the Bureau of Indian Affairs or the IRS).

Practice Point: Although the Supreme Court rarely reviews tax cases, when it does, the decision is usually important because it’s applicable to numerous taxpayers. For example, cases such as Mayo Found. for Med. Educ. & Research v. United States and United States v. Home Concrete & Supply LLC both provided significant guidance for taxpayers regarding the IRS’s scope of regulatory authority. Additionally, non-tax cases from the Supreme Court can contain general principles that are also applicable and impact tax positions taken, or being considered, by taxpayers. Thus, it is important that taxpayers and their representatives stay abreast on what is happening at the Supreme Court.




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