Proposed changes to R&D credit form may reduce examinations

The Internal Revenue Service released a preview last Friday of proposed changes to several sections of IRS Form 6765, "Credit for Increasing Research Activities," and it could help both the agency and taxpayers avoid lengthy examinations involving faulty claims.

The IRS is requesting feedback on the proposed changes from stakeholders by October 31 (see story). The federal-level R&D tax credit program was originally introduced into the Internal Revenue Code through President Ronald Reagan's Economic Recovery Tax Act of 1981. The program has continued to evolve from both a quantitative and qualitative perspective over the past four decades. 

The IRS has provided a preview of its proposed changes to Form 6765 in an effort to solicit feedback from stakeholders in advance of the formal draft release, which is expected later this year. Only some of the proposed changes address previous feedback received from taxpayers and tax professionals alike in recent years during IRS examinations.

Each year, the IRS receives thousands of tax returns from taxpayers claiming the R&D tax credit. Issues with the credit are examined in a substantial number of cases and consume significant resources of both taxpayers and the IRS alike.

To provide more effective tax administration of the R&D tax credit program, the IRS must ensure taxpayers truly comprehend the complete scope and application of the program's requirements to support claiming the credit with a sustainable tax return filing position per Circular 230. To that end, the proposed changes to Form 6765 will require taxpayers to identify, gather and document additional data on this enhanced form before filing their tax returns.

The primary proposed changes to Form 6765 include:

• A new Section E with five additional questions seeking further information;
• A new Section F for reporting quantitative and qualitative information for each business component as required pursuant to IRC Sec. 41; and,
• Moving the "reduced credit" election question and the "controlled groups or businesses under common control" question from Line 17 and Line 34 to the top of Form 6765.

The IRS is also requesting feedback on whether Section F should be optional for certain taxpayers, including those with qualified R&D expenditures less than a certain dollar amount at a controlled group level; with an R&D tax credit less than a certain dollar amount at a controlled group level; or statutorily defined qualified startup businesses claiming the payroll tax credit.

In effect, the proposed changes to Form 6765 will provide taxpayers with a consistent, predefined format for tax reporting and improve the information received by the IRS for enhanced tax administration. The IRS is considering making the changes effective beginning with tax year 2024.

All feedback on the proposed form changes, potential Section F options and questions about these changes are due by October 31 and should be submitted to Lbi.rt.team@irs.gov with "Feedback/Questions F6765" in the subject line.