On June 18, 2024, the IRS modified the required information taxpayers must provide to the Service when submitting an I.R.C. § 41 research credit refund claim. The IRS had previously released a memorandum in October 2021 instituting five required pieces of information taxpayers need to submit with a research credit refund claim. The IRS instituted these requirements to curb what it considered to be unreasonable research credit claims.

The IRS’ original five requirements for taxpayers were as follows:

• identify all business components to which the I.R.C. § 41 research credit claim relates for that year;
• identify all research activities performed for each business component;
• identify all individuals who performed each research activity for each business component;
• identify all the information each individual sought to discover for each business component; and
• provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.

Last month, the IRS scaled back these requirements by updating its FAQ webpage, effective immediately. Taxpayers no longer need to identify (1) the individuals who performed each research activity or (2) the information each individual sought to discover. The IRS may still request this information if the research credit refund claim is selected for examination.

In addition, the IRS released a draft Form 6765, Credit for Increasing Research Activities. One change to the form is that Section G, which requests the Business Component Detail, will be optional for Qualified Small Business (“QSB”) taxpayers as defined under I.R.C. § 41(h)(1) and (2) and taxpayers with total qualified research expenditures (“QREs”) equal to or less than $1.5 million, determined at the control group level, and equal to or less than $50 million of gross receipts as determined under I.R.C. § 448(c)(3).

Another change on the form is the reduced amount of business components taxpayers need to report on Section G. Taxpayers now should report 80% of total QREs in descending order by the number of total QREs per business component. The form is limited to 50 business components. The form no longer requires taxpayers to state whether a business component is new/improved, a sale/license/lease, or a narrative describing the information reported. To make a smooth transition for taxpayers, Section G will be optional for all filers for tax year 2024 before going into effect for the tax year 2025.

The changes made by the IRS are a welcomed recalibration for taxpayers. However, we still expect the service to continue to scrutinize research credit refund claims.