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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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Show Me the Money: IRS Introduces Webpage for Large Refunds Subject to JCT Review

When we previously wrote about the Joint Committee on Taxation’s (JCT) process for reviewing refund claims granted by the Internal Revenue Service (IRS), we explained that the IRS generally must submit proposed refunds in excess of $5 million for corporate taxpayers and $2 million for all other taxpayers to the JCT before any such refunds can be paid. However, getting through the JCT review process can be difficult and time-consuming in some situations—and sometimes taxpayers are left in the dark.

On September 22, 2021, the IRS announced the launch of its new webpage that provides information to taxpayers whose large refunds are subject to JCT review. Topics covered include general information about how a JCT review matter arises and how the IRS handles a JCT review case.

Practice Point: The IRS’s new webpage provides a helpful general overview of the JCT review process but does not provide any new information on it. A more detailed discussion of the JCT review process can be found in our prior post and in the JCT’s 2019 process overview.




Joint Committee Releases Overview of Its Refund Review Process

Clients ask us all of the time, “What is the Joint Committee on Taxation’s (JCT) process for reviewing refund claims granted by the Internal Revenue Service (IRS)?” Recently, the JCT has released an overview of its process. Wait, what? After the IRS has agreed to issue you a refund, there is a congressional committee that has to check the IRS’s work? Yep!

Internal Revenue Code (IRC) §6405 prohibits the IRS/US Department of the Treasury from issuing certain refund payments to taxpayers until 30 days after a “report” is given to the JCT. Only refunds “in excess” of $5 million for corporate taxpayers and $2 million for all other taxpayers (partnerships, individuals, trusts, etc.) are required to be reported to the JCT. A refund claim is an amount listed on an amended return (e.g., Forms 1140X and 1120X), tentative carrybacks (e.g., Forms 1139 and 1045), and refunds attributable to certain disaster losses. Numerous types of refund payments are excepted from JCT review, including refunds claimed on originally filed returns, resulting from litigation and employment taxes. It is important to note that this process is not limited to the IRS Examination stage; it can also occur at the IRS Appeals stage or even in tax court litigation. (more…)




IRS Updates LB&I Examination Process Guide

Effective May 1, 2016, the Internal Revenue Service (IRS) will begin applying previously announced changes to the Large Business & International (LB&I) Division’s examination process.  Publication 5125 begins by setting forth expectations for the LB&I exam team and the taxpayer or its representatives.  It then addresses IRS expectations regarding refund claims.  Finally, the publication discusses the three stages of the LB&I examination process—planning, execution and resolution—and how the IRS and taxpayers should conduct themselves during each stage.

The IRS had previously released draft publication 5125 in November 2014, which concerned some taxpayers, particularly with respect to the statement that informal refund claims would only be accepted within 30 days of the opening conference.  Final Publication 5125 retains the 30-day period for making informal refund claims, but provides that LB&I will not require a formal claim after the 30-day period if an issue has been identified for examination (unless IRS published guidance specifically requires a formal claim).  Exceptions may also be granted by LB&I senior management.

Publication 5125 also made changes to the examination process based on the recent shift to an issue-based audit approach.  The case manager will have overall responsibility for the case, which may be beneficial to taxpayers involved in recent audits where domestic and international personnel appeared to share responsibility for the conduct of the audit.  Factual and issue development are also heavily stressed, with an emphasis on the information document request (IDR) process and a focused and useful examination plan.  The publication also states that IRS team members are expected to seek the taxpayer’s acknowledgment of the facts and to resolve any disputes prior to the issuance of Form 5701, Notice of Proposed Adjustment.

Taxpayers should review Publication 5125 to familiarize themselves with the current audit process and to ensure that IRS team members are following the guidance.  To the extent an IRS team member is not following the guidance, taxpayers should not hesitate to discuss the matter with the team manager.




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