IRS continues Research Credit Refund Fight
Detailed information required under Reg. section 301.6402-2(b)(1)
TAX ALERT |
Authored by RSM US LLP
On Oct. 15, 2021, the Office of Chief Counsel released a memorandum that addressed the satisfaction of the requirements of Reg. section 301.6402-2(b)(1) for refund claims involving the research credit under section 41.
Note that this Chief Counsel Memorandum is addressed to Cheryl Teifer (Director, Field Operations Engineering (Large Business & International)), who is also the Lead Executive for the Research Issues Campaign, which LB&I announced as a campaign Feb. 27, 2020. Refer to Large Business and International Active Campaigns. So, consider this Chief Counsel Memorandum within the context of a broader campaign strategy focused on the research credit.
Despite the signal this Chief Counsel Memorandum sends, research credit claimants should not be completely disheartened. Research credit claimants have had wins in the courts relating to the specificity requirement of Reg. section 301.6402-2(b)(1). Refer to, e.g., United States v. McFerrin, 492 F. Supp. 2d 695 (S.D. Tex. 2007); Harper, 2019 WL 1877185, rev’d 2021 WL 732970; Premier Tech Inc. v. United States (D. Utah 2021); Intermountain Electronics Inc. v. United States (D. Utah 2021). The Memorandum appears to be a response to those more recent decisions and a signal on how the IRS intends to navigate the standards these decisions have articulated.
Regulation section 301.6402-2 sets forth the procedural elements for refund claims, including how a taxpayer makes a refund claim, what forms may be used and the deadlines for such claims. Included in the regulation is what the Office of Chief Counsel refers to as “the specificity requirement,” which requires that a valid refund claim must, along with other requirements, “set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.” The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury.
Reg. section 301.6402–2(b)(1).
The memorandum states that in order to satisfy the specificity requirement, a refund claim for a section 41 research credit must, at a minimum:
- Identify all the business components to which the section 41 research credit claim related to that year.
- For each business component:
- Identify all research activities performed;
- Identify all individuals who performed each research activity; and
- Identify all the information each individual sought to discover.
- List 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).
Note that the emphasis on business component is consistent with trends RSM research credit practitioners are seeing in IRS exams.
This information must be submitted when the refund claim is filed.
Regulation section 301.6402-2 also provides that the statement of the grounds and facts must be verified by a written declaration that the statement is made under the penalties of perjury. The Counsel memorandum states that in most cases, the signature on the Form 1040X or 1120X will fulfill this requirement, since such a signature covers not only the claim form but also what is attached to it (incorporated by reference). Regulation section 301.6402-2(b)(1); refer to Mattson v. United States, 153 Fed. Cl. 476, 483-484 (2021).
A taxpayer may satisfy the requirements with a narrative that contains the elements outlined above; no other documents are required. According to the memorandum, if a taxpayer does provide documents, including a credit study, with the claim, the taxpayer must specifically identify where in the documents the facts responsive to each of the five elements listed above can be found. According to the memorandum, “[a] mere volume of documents will not suffice to meet a taxpayer’s obligation.”
Regulation section 301.6402–2(b)(1) also states that a claim which does not comply with the specificity requirement will not be considered for any purpose as a claim for refund or credit. This is an additional reason taxpayers filing claims for refund based on research credits should consider following the guidance contained in the memorandum.
Satisfying the specificity requirement of Reg. section 301.6402-2(b)(1) is critical not only to the acceptance and processing of a claim for refund, but also because doing so is a jurisdictional prerequisite to filing a suit for refund. Prior to such a suit, a taxpayer must have first timely submitted a refund claim that complied with all of the regulatory requirements. Refer to section 7422(a) (“No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax . . . until a claim for refund or credit has been duly filed with the Secretary . . ., according to the provisions of law in that regard, and the regulations of the Secretary.”); Nick's Cigarette City, Inc. v. United States, 531 F.3d 516 (7th Cir. 2008); Quarty v. United States, 170 F.3d 961, 972 (9th Cir. 1999); Beckwith Realty, Inc. v. United States, 896 F.2d 860, 863 (4th Cir. 1990); Stoller v. United States, 444 F.2d 1391 (5th Cir. 1971); Boddie-Noell Enterprises, Inc. v. United States, 36 Fed. Cl. 722, 728 (1996); see also Commissioner v. Lundy, 516 U.S. 235, 240-52 (1996) (noting that under Reg. section 301.6402-2(b)(1) a claim for refund in district court must state the grounds for refund with specificity).
The memorandum recommends that the Service reject as deficient any claim for refund relating to the research credit which does not include the information described above or which is not signed under penalty of perjury. According to the memorandum, such a rejection, in lieu of initiating an audit (or otherwise actively considering the refund claim on its merits) should eliminate the possibility that a court will find that the Service has waived the specificity requirement under Reg. section 301.6402–2(b)(1).
Note also that a rejection of a refund claim may preclude a taxpayer from amending or perfecting their claim if they did not satisfy procedural requirements and the statute of limitations to file a new refund claim expires prior to any perfection of the claim. Refer to United States v. Memphis Cotton Oil Co., 288 U.S. 62, 71 (1933); Mobil Corp. v. United States, 52 Fed. Cl. 327 (2002); Sierra Pac. Res. v. United States, 56 Fed. Cl. 366, 376-377 (2002).
If you are contemplating the filing of a refund claim stemming from a research credit under section 41, or if you have any questions concerning the requirements of such a claim, please contact your tax advisor or one of the authors listed above. And in the meanwhile, stay tuned.
Call us at (520) 884-0176 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Alina Solodchikova, Rory Bertiglia, Tony Coughlan, Mike Zima and originally appeared on 2021-10-19.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
As a member of RSM US Alliance, we would like to share this with you.
Keegan Linscott & Associates, PC is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Keegan Linscott & Associates, PC can assist you, please call (520) 884-0176.