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Your Guide to the IRS Chief Counsel Memo

New IRS Rules for Research Credits on amended returns

The IRS has changed its rules, and is giving R&D credits tougher scrutiny.  If you’re filing for a Research Credit on an amended return, the Form 6765 is no longer sufficient: you must now also list the business components, the activities performed, the people who did the research, and questions they tried to solve.  This new rule doesn’t affect original returns.

IRS building

The initial announcement was in a Chief Counsel Memo on October 15th 2021, and the IRS published clarifications last week (January 5, 2022).  The rule took effect this week (January 10, 2022).  The old information you needed to provide was the Form 6765 (which lists total Qualified Research Expenses in four categories) and the taxpayer’s declaration that the facts are accurate, signed under penalty of perjury (their signature on Form 1120X or 1040X provides this). 

In addition to the old information, the new information the IRS requires is:

  • What products or tools the research was done on, in the form of a list of “business components.”  A business component is "any product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, license, or used in a trade or business of the taxpayer."  And then, for each business component:
    • The research activities performed.  The IRS doesn’t define “activities” in the Chief Counsel Memo, but it does list example activities in other places, like the audit guide for research credits in software development, which lists maintenance, debugging, writing code for new features, and many others, some of which qualify and some of which don’t.
    • The people who did each activity.  You can list either their names or their titles/positions.  You can also group people together, and say merely that the group worked on an activity.
    • The technical uncertainties they worked on.  The Chief Counsel Memo specifically says “the information each individual sought to discover.”  This echoes the Four-Part Test’s definition that research must seek to “eliminate a technical uncertainty,” meaning that at the project’s outset, the taxpayer was either uncertain that it could be successfully developed, or uncertain how it should be developed.  You don’t need to have resolved the uncertainty; one characteristic of research is that it often fails.

The IRS wants a neat and organized document that lays out this information, not just a mountain of pages that contains the information somewhere within.  And they want it as an explanation or attachment to Form 1120X or 1040X, and for you to mail, or ideally, fax it to them.

For 2022, if you submit an amended return that doesn’t have the required information, or the IRS deems your information inadequate, they’ll send you a notice giving you 45 days to “perfect” and resubmit it.  In 2023, they’ll discontinue the 45-day resubmit option, so they can reject it outright with no second chance.

This is different from an audit, because if your credit is disallowed under audit, you can challenge it in court and argue the legal merits of your research credit.  But if your credit gets rejected for insufficient documentation, that’s a procedural issue akin to you failing to properly file a form, for which you cannot turn to the courts.  At least, that’s what the IRS Office of Chief Counsel believes, and they draw a big distinction between “disallowed” and “rejected.

The IRS has much more power and leeway over amended returns than over original returns, thanks to administrative law and several court cases described in the Chief Counsel Memo.  Basically, when a taxpayer files an amended return asking for a refund, the burden is on them to clearly explain what was wrong with the original return; it’s not the IRS’ job to work hard to figure out the taxpayer’s mistake.

One motivating factor is that R&D credit specialist firms have proliferated in recent years, and some of them push their new clients to amend prior year returns and make those credits as aggressive as possible regardless of documentation, knowing that audits are currently rare.  Now, by requiring some documentation at the outset, the IRS can decide which amended returns to flag for audit.  Also, the Service previously had no way to tell which R&D credit specialist firms were behind which returns, since specialist firms often only calculate the credit but don’t prepare the tax return as a whole.  By seeing all these reports, the IRS will probably be able to recognize patterns in returns filed by certain large specialist firms, which would let it select all clients of a firm for extra scrutiny.

How enables compliance

Luckily, we were using this methodology for all returns (original and amended) long before the Chief Counsel Memo was published. is a platform that enables accountants to confidently lead data-driven R&D credit studies for their clients.  Within a tax year, it breaks down the research into “projects” or “business components,” classifies qualified and non-qualified activities on each project, and reports which employees or contractors worked on which activities on which projects. also compiles task-level data by importing version control logs (from companies developing software) and project management data (from companies in any industry).  This creates a work log for each person, which makes it easy to extract the questions of technical uncertainty that they worked on (“the information [they] sought to discover”).  For companies that don’t have these types of data, and instead base their credits on surveys, is still designed to segment costs by business component, activity, and individual, and to describe what each individual worked on.


Our goal has always been to help accountants find the correct Qualified Research Expense amount, to document it thoroughly, and to do all that as efficiently as possible, using the client company’s own data.  To learn more, see if we might be able to help your firm, or schedule a demo, contact us.

Disclaimer: The information you obtain at this site is not, nor is it intended to be, tax advice.