Filing an Amended Return for R&D Tax Credits? There’s a January 10 Deadline to Comply with Stringent New IRS Reporting Rules

If you’re filing an amended return for R&D tax credits, time is running out.

On October 15, the IRS, via IRS Memo: IR-2021-203, gave taxpayers only a three-month warning (extending to January 10, 2022) that if they intend to file retroactively to capture R&D tax credits on an amended return for prior years, they must now also include much more detailed supporting documentation and substantiation. 

Now taxpayers are tasked with identifying all business components where Section 41 relates. For each component, they must:

  • Identify all research activities performed
  • Identify all individuals who performed each research activity
  • Identify all information each individual sought to discover
  • Provide total employee wage expenses
  • List total qualified supply expenses
  • Report qualified contract research expenses.
r&d tax credits

Forms and Eligibility

Taxpayers should use Form 6765, Credit for Increasing Research Activities, to provide their total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. Taxpayers will be offered only 30 days to perfect their refund claim. After such time, the IRS will make a final determination—which will not be eligible for appeals, an extraordinary precondition to impose on taxpayers. 

Since the new guidance takes effect very soon on January 10 next year, the process to compile the necessary data will take considerably more effort if a tax credit application is to pass review. This provision not only greatly increases the effort and data needed to file for prior year credits, but it could also increase the risk in filing amended returns to claim R&D. 

Three-Month Warning

Because the formal rules were announced October 15 with an effective date of January 10, 2022, taxpayers were only being given a three-month advance warning period when this will take effect. As a result, if a taxpayer is filing for R&D tax credits in an amended prior year return and their recordkeeping failed to meet all these newly introduced criteria, they must scramble to ensure that by January 10, they will have retroactively collected the additionally required information from now back until January 1, 2021; and going forward, they must adhere to these new reporting standards for their ongoing research activities.

By announcing this rule change on such short notice, the IRS is also putting taxpayers at a serious disadvantage. Working across several industries and businesses, every company tracks its expenses and efforts differently. Forcing everyone to adhere to a cookie-cutter approach severely disadvantages small businesses and those with few resources, as it is, to claim R&D tax credits. 

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