United States

TIGTA Report suggests changes to R&D credit carryforward exams

TAX ALERT  | 

A recent Treasury Inspector General for Tax Administration (TIGTA) report identified serious discrepancies in general business credit (GBC) carryforward claims, focusing on the research and development credit (R&D Credit) as the most significant contributor to the erroneous claims. 

As background, the GBC consists of multiple tax credits that include the R&D Credit and is subject to various limitations on utilization within a tax year. The GBC is further subject to limitations on its ability to be carried back and carried forward to other tax years, as described in section 39. Section 39(a)(1) generally provides that any credit exceeding the utilization limitations provided in section 38(c) shall be carried back to the preceding tax year, then forward to the other 20 tax years. 

In reviewing the GBC carryforward claims, the TIGTA audit found 19,193 taxpayers with carryforward discrepancies containing a tax effect of approximately $5.1 billion dollars. The definition of “discrepancies” was redacted from the report, however it appears to refer to a GBC carryforward that differs from what the previous tax return reports—potentially allowing erroneous credit claims to be incorrectly applied against tax. However, both TIGTA and the IRS note that there may be legitimate reasons for some of the discrepancies. This includes acquisitions of entities containing additional credit carryforwards or adjustments to the carryforward schedule from previous years to account for previously unclaimed credits in accordance with Rev. Rul. 82-49.  

With the TIGTA audit in mind, the IRS has agreed to implement the following corrective actions:

1. Addition of carryforward information to the risk assessment tool targeting R&D credit examinations

2. General review of SB/SE returns with carryforward discrepancies to determine if all returns containing credit carryforward discrepancies should be selected for exam

3. Update case management systems to include GBC carryforward information

4. Consider updates to Form 3800 for the GBC

Key Takeaways

It’s not clear exactly what action the IRS will take, but it will almost certainly involve more scrutiny to returns with GBC carryforwards (especially those with GBC carryforward amounts differing from year to year). When considering carryforwards of the GBC, taxpayers need to take care to ensure they are following all applicable rules and consulting with an experienced tax professional when appropriate. 

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