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LB&I directive: Centralized risking of cases with research issues

Centralized risking of cases with research issues

The IRS Large Business and International (LB&I) division publicly released a directive as guidance for LB&I examiners concerning the requirements and process for centralized risking of cases with potential research issues under Code sections 41 and 174.

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The LB&I directive* (LB&I-04-0320-0006, dated March 10, 2020):

  • Applies to LB&I examinations of industry cases, large corporate compliance cases, and all claims and amended returns
  • Does not apply to research issues campaign inventory or compliance assurance process (CAP) program cases
  • Is effective for new research issues identified on or after April 1, 2020

The directive explains the function of the “Research Risk Review Team” (RT) that consists of subject matter experts, engineers, revenue agents and other specialists and that promotes compliance by focusing its efforts on helping identify high-risk returns, including claims and engages in knowledge sharing through collaboration with field employees.

* An LB&I directive is a memorandum from the LB&I Division Commissioner within the Internal Revenue Service (IRS) to IRS directors and field specialists in order to provide notice and field direction on the application of a particular section or concept within the Internal Revenue Code.

KPMG observation

The directive requires the review and concurrence in most instances when the IRS field team and specialists want to examine a research issue. This will presumably provide more consistent decisions about when a research credit issue represents sufficient compliance risk to warrant examination. It’s noteworthy that the RT is not required to review or concur in a decision not to examine a research issue.

This new LB&I directive follows the addition in February 2020 of two IRS compliance campaigns—Section 41 Research Tax Credit Issues and Fuel Credits under Section 6426—to the list of campaigns. Read TaxNewsFlash.  Interestingly, the new directive states that it does not apply to research issues campaign inventory or compliance assurance process (CAP) program cases, which suggests the IRS has determined other methods for risk assessing research issues within the new campaign as well as within CAP engagements.

The recent IRS campaign designation of R&D issues and the new LB&I R&D directive are important reminders regarding the preparation of all research tax credit claims, and their audits, including:

  • Establishing that all four-part test (and additional three-part tests for internal-use software) for qualifying research have been met
  • Establishing a nexus or connection between claimed qualified research expenses (QREs) and qualifying activities
  • Having detailed work papers identifying the amounts and types—e.g., allocable W2 wages; supplies; rental or lease of computers used in research; and 65% of contract research costs—of all QREs and the overall credit calculation (e.g., regular / traditional research credit or alternative simplified credit)
  • The formalization of risk assessment processes and other exam processes may lead to more efficient exams
  • Maintaining a good working relationship with exam teams can facilitate exams


For more information about the new IRS directive, or any R&D issue, contact a tax professional with KPMG’s Research Credit practice:

Michael Dolan | +1 (202) 533-6150 | mpdolan@kpmg.com

Tyrone Montague | +1 (212) 954-6818 | tmontague@kpmg.com  

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