A recent IRS legal memo specifying information that taxpayers must provide starting early next year in a claim for refund for a tax credit under Sec. 41 for increasing research activities (research and development, or R&D credit) applies to claims on amended returns only, said Holly Paz, deputy commissioner of the IRS Large Business and International (LB&I) Division.
Paz, speaking to the fall meeting of the AICPA IRS Advocacy and Relations Committee online, addressed that and other points of the new documentation requirements, which were announced in IRS News Release IR-2021-203 issued on Oct. 15 and contained in Field Attorney Advice (FAA) memo 20214101F by the IRS Office of Chief Counsel, publicly released the same day.
The requirements also were the subject of a comment letter by the AICPA on Nov. 18, signed by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, to Paz and LB&I Commissioner Nikole Flax. The letter requests that the IRS delay imposing the requirements beyond the end of a "grace period" that, according to the IRS news release, will end Jan. 10, 2022. Such a delay would allow a "meaningful opportunity to comment" before implementation of this "significant change in the general requirements" for a refund claim, the comment letter states.
The FAA states it applies to administrative refund claims, and Paz told the committee it would be applied only to amended returns, not originally filed ones. The new requirements arose from problems of refund claims received by the IRS "routinely" with "little or no information," which requires opening an examination for the IRS to determine their validity, she said. Regs. Sec. 301.6402-2(b)(1) requires taxpayers to provide sufficient information regarding the grounds and facts upon which a refund claim is based ("specificity requirement"), but that generality was seen to need a more tailored application to R&D credit claims, which often hinge on particular facts.
"We at the IRS have never put out anything on what it takes to meet that specificity or sufficiency requirement," with respect to refunds of the R&D credit, Paz said.
Paz also pointed to the IRS news release's statement that after the grace period, during a one-year transition period, the IRS will allow taxpayers 30 days after filing a claim in which to remedy any lack of information under the new requirements before the IRS makes a final determination.
The FAA and news release provide that for an R&D credit refund claim to be considered valid, it must:
- Identify all business components to which it relates;
- For each of those business components, identify all research activities performed;
- For each of those research activities, provide the name or names of the individual or individuals who performed the activity and describe the information each individual sought to discover; and
- Provide total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year (these may be provided on Form 6765, Credit for Increasing Research Activities).
Committee members in the meeting questioned whether the IRS's procedure for imposing the requirements is duly deliberative.
"I'm disappointed this wasn't wrapped in the regulatory process," said Rochelle Hodes, J.D., LL.M, principal, Washington National Tax, Crowe LLP, and the committee's vice chair. "That something that would be an interpretation of the regulations, both the R&D regulations and Sec. 6402, would be done in the form of an IRS memo between legal counsels, as opposed to a regulation speaking for itself." By the latter process, there would be a period for public comment and IRS response, Hodes pointed out.
"There are lots of folks I've contacted in practice who do have a lot of thoughts on this," she said.
Paz noted the IRS news release's inclusion of an email address for comments and said the IRS will issue frequently asked questions and interim guidance on the change.
Committee member Alina Solodchikova, J.D., LL.M., principal, RSM US LLP, asked about the 30 days for a taxpayer to perfect an insufficient claim. If correspondence between the taxpayer and IRS stretches beyond that time, will the taxpayer lose appeal rights on what after all has not yet been accepted as a claim?
Paz replied that whether the 30 days can be extended would be answered in further guidance.
The committee also heard from Fred Schindler, director, collection policy, within the Small Business/Self-Employed (SB/SE) Division, who detailed the Service's continuing adaptation to the pandemic's interference with both revenue officers' and agents' work and taxpayers' ability to pay.
"We know that, as people have been living through the pandemic, there's a lot of financial difficulty out there," Schindler said. "We've instructed agents to be thoughtful and deliberate in their collection activities."
Schindler also described a change prompted by a Taxpayer Advocate Service (TAS) recommendation with respect to accepted offers in compromise (OICs). Previously, taxpayers' refunds were offset, or withheld by the IRS to pay outstanding tax liabilities, in some cases even after their OIC had been approved, but now, in cases of refundable credits or hardship, the division is allowing OIC taxpayers to receive their refunds, he said.
Schindler also reported that online payment agreements have increased, reducing some pressure on the IRS's overwhelmed telephone lines.
National taxpayer advocate
Finally, the committee hosted National Taxpayer Advocate Erin Collins, who heads TAS and on Nov. 16 had addressed the AICPA National Tax Conference in Washington. Collins commiserated with the practitioners about ongoing return processing and correspondence delays at the IRS.
"Paper is not the IRS's friend," Collins said, citing a recent filing season statistic for 2020 returns showing about 8 million original returns filed on paper still remaining to be processed. "What is the impact going to be on the next filing season if we go into it with this kind of hole?" Collins asked.
— Paul Bonner (Paul.Bonner@aicpa-cima.com) is a Tax Adviser senior editor.