§ 301.6402–2(b)(1).”).įinally, in discussing the application of the four-part test that activities must satisfy to be eligible for the Section 41 credit, the Memorandum adopts the language of the Tax Court’s recent Little Sandy Coal decision. See Memorandum at 21 (“Rejecting a deficient refund claim before initiating an audit (or otherwise actively considering the refund claim on its merits) is recommended and should eliminate the likelihood that a court will find the Service waived the specificity requirement under Treas. Thus, it encourages agents not to begin the process of auditing a Section 41 claim and to reject it as deficient unless the claim, as filed, contains the information described above. Second, the Memorandum notes that the IRS may waive its right to treat a claim as deficient if it proceeds to examine the merits of the claim. By definition, one who uses sampling only has the supposedly necessary information for units in the sample and then extrapolates from that to the rest of the population. The Memorandum also does not address what a taxpayer who used a valid statistical sample under Rev.
The court observed that Form 6765 does not ask for any of those details, and “if the IRS wants more information about the research tax credits, the IRS could require that information on Form 6765.” Id. The Memorandum acknowledges the existence of this authority and says that the IRS is “currently evaluating the opinion.” Memorandum at 11, fn. In Premier Tech, a federal district court recently rejected the government’s assertion that a taxpayer must include in every Section 41 refund claim “additional documents addressing every single element in, such as describing the research conducted, explaining how that research worked to develop a business component, detailing on whose wages and what supplies the money was spent, and proving the amount spent on research in the prior three tax years.” Premier Tech, 2021 WL 2982064 at 4. The Memorandum cites no authority for the other requirements, and mandating the provision of more information than what Form 6765 calls for could “lead to absurd and patently unfair results for taxpayers.” Premier Tech, Inc. However, the other requirements go far beyond what courts mandate and demand a level of detail that conceivably could stretch into the thousands of pages. The last purported requirement should come as no surprise, as it directs taxpayers to provide the information required on Form 6765, the form on which a credit is claimed in the first place. Then the Memorandum asserts that, for each identified business component, the claim must “identify all research activities performed identify all individuals who performed each research activity and identify all the information each individual sought to discover.” Id. Finally, the Memorandum indicates that the claim must “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).” Id. § 41 research credit claim relates for that year.” Memorandum at 21. The conclusions of the Memorandum, if followed, would represent a sea change in the IRS’s approach both to research credit refund claims and to the research credit more broadly.įirst, the Memorandum concludes that for a research credit refund claim to be valid, the claim itself must “identify all the business components to which the I.R.C. § 41 Credit for Increasing Research Activities. On Friday, October 15, 2021, the Internal Revenue Service (IRS) Office of Chief Counsel published a memorandum (the Memorandum) purporting to answer the question of what a taxpayer must include in a claim for refund relating to the I.R.C.