New IRS Research Tax Credit Rules Sparks a Tax Season Scramble

The IRS quietly posted the final version of Form 6765, Credit for Increasing Research Activities, and the associated instructions last month, requiring taxpayers to furnish the most comprehensive information needed to claim the research tax credit since 1981. The research tax credit encourages companies—across any industry—to invest in technical design and development activities in the US for new or improved products, processes, and software.

The final form and instructions were posted after the 2024 filing season began, mirroring a draft version released in December—complete with its original errors. It was released without any official announcement or news release, prompting taxpayers and service providers to learn of the change through informal channels and word-of-mouth.

Although some tax returns already have been filed—potentially before the form was even available—and others are in queue, taxpayers and tax preparers need to be aware of the change and educate themselves to ensure proper compliance for three main reasons.

The way you determine research credits may now be insufficient. Taxpayers and tax preparers may need to strategize new approaches for compliance. For example, a statistical sampling approach under Rev. Proc. 2011-42, which is a valid research credit method, likely won’t have all the information that the form requires. This is either because of the sample unit definition or because the sample units selected don’t cover the new required details.

The IRS acknowledges some may be using the statistical sampling methodology but still requires compliance “irrespective of which business components were used for your statistical sample.”

The IRS will risk-assess your Form 6765. As stated in the 2023 news release accompanying the preview Form 6765, the changes will help the IRS use “enhanced data and analytics to operate more efficiently and select the highest risk cases.”

The IRS doesn’t say how it will determine the highest risk cases, but one can infer. For example, Section 41 of the federal tax code doesn’t prevent a corporate officer from being included in qualified research expenses, and courts have ruled titles don’t dictate whether qualified research activities were performed.

But the IRS’s request for qualified wages attributable to officers in the new Section E of Form 6765 highlights a potential area of high-risk focus. Taxpayers must ensure they have the appropriate documents to show the amount of time officers spent on research activities, why those activities were qualified research, and why their wage amount was reasonable.

The new Form 6765 will take longer to prepare. While the instructions offer a caveat of estimated time needed based on each taxpayer’s circumstances, the estimates somehow match the prior forms, even though the new form and instructions are significantly longer.

Taxpayers need to factor in enough lead time to gather the information and prepare the form and attachments; the information requested isn’t something that can easily be completed at the deadline.

The silver lining—if one can be found—is the new form requirements come in a phased approach. The new Section G of Form 6765, requiring substantial information about a taxpayer’s business components (that is, research projects) is optional for tax year 2024.

As we know, the tax landscape can shift dramatically within a single year. Will the IRS, under the new administration, alleviate the taxpayer burden related to Form 6765—or at least maintain levels seen over the past 40-some years? Will the IRS’s expected resource limitations draw focus elsewhere, leaving what’s already in motion left unchanged, without addressing unanswered questions? Or might we find ourselves somewhere in between?

With the 2024 tax filing season well underway, taxpayers claiming the research credit must quickly evaluate the requirements and strategize how to approach the current and future tax years. Comments can be submitted to lbi.rt.team@irs.gov through June 30, using the subject line: “Instructions for Form 6765.”

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Travis Riley, tax partner at Moss Adams, is a leader in the firm’s R&D practice in California.

Josh Harbin, CPA, is an R&D tax senior manager at Moss Adams specializing in tax credits and incentives.

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