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The New Guardians of R&D: IRS Classifiers and the Future of Tax Credits

DST Advisory Group-IRS Classifiers and the Future of Tax Credits

IRS Classifiers and the Future of Tax Credits

The pursuit of the Research Tax Credit has always hinged on two critical pillars for taxpayers: ensuring claim validity and providing clear, concise information. Previously, we’ve explored the rigorous requirements set by the IRS to validate claims, highlighting the need for a straightforward information delivery to secure these valuable credits. Yet, the journey to claim these credits has become increasingly complex, prompting the need for meticulous preparation and strategy.

Historically, the research tax credit has been a pivotal incentive for fostering innovation. However, recent shifts have introduced more intricate compliance landscapes for taxpayers, illustrated by a series of key legislative and policy updates:

  • September 2017: Introduction of the ASC 730 Directive, offering a ‘Safe Harbor’ provision to simplify the claim process for eligible taxpayers.
  • December 2017: Passage of the Tax Cuts and Jobs Act (TCJA), which brought sweeping alterations to the tax code, affecting R&D tax credit provisions.
  • February 2020: Launch of the Research Tax Credit Campaign by the IRS, highlighting a focused review on research credit claims.
  • March 2020: The directive on Centralized Risking of Research Issues aimed to consolidate risk assessment for R&D claims.
  • October 2021: Release of a Chief Counsel Memo (CCM), effective January 2022, mandating additional documentation for amended returns.
  • February 2022: Updates and clarifications to the CCM provided through FAQs, aiming to aid taxpayers in compliance.
  • September 2022 and October 2023: Extensions of the grace period for deficient claims, reflecting the IRS’s ongoing support to accommodate taxpayers’ adherence to new standards.

In response to the need for a more thorough review of incoming claims, the IRS has intensified its desk review processes, deploying a specialized group known as “classifiers.” These individuals, newly appointed to the IRS team, are responsible for assessing the risk associated with each claim.

What is a classifier?

What is a classifier, exactly? It seems that their role is to delineate taxpayer claims into two categories: risky and non-risky. These classifications are part of the IRS’s initiative to streamline claim validation. Classifiers function as an arm of the examination team, wielding a specific skill set to evaluate claims against the backdrop of the IRS directives—presumably the 2020 Centralized Risking of Research Issues.

For taxpayers, crafting a CCM that passes this scrutiny and falls into the non-risky category is paramount. The CCM must succinctly include:

  • Identification of all business components for the claim year.
  • For each component, a listing of research activities, individuals involved, and the information each sought to discover.
  • A summary of the total qualified employee wage expense, supply expenses, and contract research expenses (potentially detailed on Form 6765).

To ensure your Chief Counsel Memo aligns with these IRS requirements and successfully navigates classifier review, DST Advisory Group recommends the following key guidelines

  • Brevity and Clarity: Directly and succinctly address the IRS inquiries.
  • Simple Language: Communicate effectively using plain language.
  • Direct Responses: Provide only the requested information pertinent to the IRS’s specific queries.
  • Efficient Identification of Personnel: Group individuals involved in research activities where feasible, as indicated in IRS FAQs.

Building on the foundation laid by our key guidelines, DST Advisory Group offers additional tactical advice for a more nuanced approach to your CCM preparation

  1. Targeted Answers: Ensure each response is directly relevant to the IRS’s inquiries.
  2. Avoid Legalese: The CCM is a factual document; keep it straightforward and jargon-free.
  3. Relevant Details Only: Include details that directly respond to the questions posed.
  4. Group Where Applicable: Organize information using group categorizations where suitable.

Classifiers are expected to continue evaluating these documents, including forthcoming revisions to Form 6765, until an AI-driven solution is established, ensuring each claim is appropriately assessed for risk.

As we navigate the complexities of tax compliance, understanding the role of classifiers is crucial for any taxpayer aiming to achieve success in securing the research tax credit.

As the landscape of research tax credits continues to evolve, understanding the role of IRS classifiers is more crucial than ever for ensuring your claims meet the stringent requirements set forth by tax authorities. Engaging with these new dynamics can significantly enhance your ability to navigate the complexities of tax compliance and maximize your potential benefits. For those seeking further guidance or needing assistance with their tax credit claims, we invite you to connect with our expert team at DST Advisory Group. Together, we can refine your approach to meet the latest IRS standards and help secure the credits your innovations deserve. Contact us today to learn more about how we can support your business’s growth and success.