IRS Issues Draft Instructions to Claim the R&D Tax Credit on Amended Returns

On October 15, 2021, the IRS issued Chief Counsel memorandum FAA20214101F, which introduced new procedures for taxpayers claiming R&D Tax Credit refunds. Effective January 10, 2022, this new guidance required taxpayers to submit additional information that was not previously requested on Form 6765 to substantiate their R&D Tax Credit claim in order to receive refunds for the R&D Tax Credit on an amended return. On January 12, 2023, the IRS released draft instructions for Form 6765 included in a section at the end of the instructions titled “Research Credit Claims on Amended Returns.”

Similar to the FAA20214101F memorandum, the Form 6765 draft instructions list five specific items that taxpayers must include to either file an amended return to claim R&D Tax Credits or to amend their return for an increased credit amount. 

The five items required for amended R&D Tax Credit claims are listed below:

1. The factual basis of your section 41 research credit claim.
2. The research activities performed.
3. The individuals who performed early research activity. A taxpayer may instead identify the individuals who performed each research activity by listing the individual’s title or position.
4. The information each individual sought to discover.
5. The total qualified employee wage expenses, total qualified supply expenses, and total qualified contract expenses paid or incurred for section 41 research credit claim or complete the Form 6765.

Similar to the guidance provided in FAA20214101F, the draft instructions indicate that taxpayers submitting a report or document that includes information beyond the five items listed above must identify the exact pages that contain the requested information.

The draft instructions include additional guidance for partnerships subject to the Bipartisan Budget Act audit rules:

BBA Partnerships must also submit Forms 8985 and 8986 to the IRS and send Forms 8986 to its partners. BBA Partnerships do not need to provide the five items of information on the Forms 8985 and Forms 8986 where the five items of information are included with the Form 6765 attached to the BBA Partnership’s AAR.

Further, partners of BBA partnerships are provided with the following guidance in the draft instructions:

BBA Partnerships cannot file amended returns; they must instead file AARs. A BBA AAR is a statutorily provided type of amended filing used to change partnership-related items for any partnership taxable year. If you are a partner of a BBA and filing a return that includes a section 41 credit for increasing research activities from the BBA Partnership's AAR, you may, but are not required to, include the five items of information with your return to which your Form 8978 is attached if the BBA Partnership has provided the information with its AAR.

The IRS initially provided for a one-year transition period ending January 10, 2023, which has been extended to January 10, 2024. During this transition period, taxpayers will be given up to 45 days to “perfect” any deficient claims. However, according to FAA20214101F, if a claim fails to meet the minimum requirements, the IRS is directed to reject the claim as invalid.

Despite the additional requirements to claim the R&D Tax Credit on amended return, taxpayers who are properly identifying and calculating their R&D Tax Credit as prescribed in Internal Revenue Code Section 41 should already possess the required information. If you have any questions with respect to the R&D Tax Credit calculation or the new information required to claim the R&D Tax Credit on amended return, contact a member of our Credits & Incentives team for further information.  

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