As we previously reported in a recent post, the IRS Chief Counsel published a memorandum on October 15, 2021 regarding the documentation needed in order to successfully support a claim under the IRC Section 41 Investment Tax Credit for Increasing Research Activities. That section is widely known as “The Research Credit”. The Chief Counsel memo and a description of its contents can be found here in PDF and also on our previous blog post.
The IRS has now clarified that it intends to enforce the proposed requirements for documentation of all research credit claims immediately, without pursuing the usual regulatory process of issuing a Technical Advice Memorandum (TAM) or other pronouncement. IRS has published a very short grace period deadline of January 10, 2022. After this date, claims for research credit support will be deemed deficient (and therefore subject to summary denial) if they are not supported by documentation explaining the basis for each claim.
According to General Counsel Memo 2021410F, each claimant must demonstrate that all elements of the claim pass the four-part test outlined in the regulations. These include assertions that there is at least one technological advance envisioned at the beginning of each project; that the effort is part of a business component of the taxpayer; that there is a degree of technological uncertainty that must be overcome as part of the project; and that a process of experimentation was in fact undertaken in an effort to achieve the goals of the project.
We can summarize these requirements in three simple steps:
- You are trying to do something new and different in a technical sense as part of your business,
- You are unsure how or whether it can be achieved within the bounds of your project such as cost, resources, etc., and
- You actually tried to overcome your uncertainties by experimenting with alternatives.
The new IRS position is in opposition to its own established procedures, under which changes to regulations are first proposed, then subjected to a period of public review and comment, and eventually codified under a formal pronouncement. This change in policy on the part of the IRS is sudden and unusual.
However, the fundamental documentary requirements have not changed. Many claimants have simply not heeded them. Here at TCA, we have *always* provided comprehensive documentation that is fully responsive to published IRS requirements, especially in their audit guide for this issue. If you are planning to file a research credit claim this year, or if you are not sure whether you might qualify, we urge you to call us at you earliest convenience. We are here to help.
The Section 41 provisions are intended to help keep technological, engineering, manufacturing and software jobs here in the United States. Our mission is to help you identify and claim all of the benefits you are entitled to under this important incentive program!
If we can be of any assistance, please call us today at 508-842-3232.
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