Understanding the Specificity Requirement for Claiming R&D Tax Credits

Enacted initially to incentivize research and development in the U.S., the R&D credit allows taxpayers to claim eligible R&D credits in open tax years.

However, as outlined by an IRS memorandum on October 15, 2021, taxpayers now face heightened requirements to claim R&D credits on amended tax returns. This is known as the “specificity requirement.” Previously, taxpayers were only required to file an accurately completed Form 6765 on an amended return to claim eligible R&D credit.

A federal court case (Premier Tech v. United States) highlights these previous requirements. In the case, the IRS claimed the defendant needed to “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” for its amended credit claim.

What is the specificity requirement?

Touted by the IRS as a tactic to eliminate administrative delays and disputed credit claims, the “specificity requirement” consists of four parts.

In addition to filing an accurate and complete Form 6765, taxpayers are now required, at minimum, to:

1. Identify all business components to which the R&D credit claim relates for the tax year.
2. For each business component:
• Identify all research activities performed.
• Identify all individuals who performed each research activity.
• Identify all the information each individual sought to discover.

There is limited guidance regarding the level of detail the IRS seeks with this new requirement. Failure to comply with the specificity requirement can result in a disallowance of claimed R&D tax credits.

What happens if the IRS rejects the amended claim?

If the IRS rejects an amended credit claim, the taxpayer will receive a deficiency letter with a 45-day response period to perfect the claim, pursuant to a grace period that remains in effect until January 10, 2025. However, if the required documentation is not included in the amended return or the 45-day response, the taxpayer is not entitled to the R&D Credit and will likely be disallowed to include on amended return.

What’s next with the specificity requirement?

The specificity requirement may encourage some taxpayers to assess the costs versus benefits of claiming R&D credits on amended returns. Often, though, the potential benefits far outweigh the burdens of compiling the substantive detail for the specificity requirement.

Taxpayers are encouraged to consult with qualified R&D professionals to assist in preparing an amended credit claim. With years of experience in tax savings and compliance, the Eide Bailly Research & Development Tax Credit team is well-equipped to provide proper counsel for navigating the specificity requirement.