Executive Summary: IRS Changes R&D Credit Form 6765

On September 15, 2023, the IRS announced that it will be changing the R&D Credit Form 6765 by adding two new sections to the form.

Form 6765 - BEFORE the change

Tax Form 6765 is the form all taxpayers use to compute an R&D tax credit. The form is simple and straightforward.  Most taxpayer report four or five numbers, do some simple math, and attach the form to their tax return. That’s it.

Completing the form and filing the credit is the easy part of the process. The more complex part of the process is completing the analysis that generates the four or five numbers that go on the form. Most taxpayers hire a CPA firm to conduct this analysis. This is commonly referred to as doing an “R&D Credit Study”. The outcome of the R&D credit study is an analysis report that should contain all the detail behind the four or five numbers that go on the form.

Before the Form 6765 changes, CPAs had gotten lazy in completing the analysis reports. Typically, the reports only analyze a few “sample” research projects, are very light on any meaningful project analysis, and are not completed until AFTER the taxpayer has prepared the Form 6765 and filed the tax return. This has frustrated the IRS. They know that this process produced poorly prepared and at times, fraudulent credits.  

Poor behavior drove change

The IRS is cracking down on the CPAs lazy work. Officially, the IRS states,

“Proposed changes to Form 6765 will provide taxpayers with a consistent and predefined format for tax reporting and improve the information received for tax administration. They will also build on ongoing efforts to manage Research Credit issues and resources in the most effective and efficient manner possible.”[1]

Let’s unpack what’s really going on here. When the IRS says “consistent and predefined format” it means they didn’t like the poor analysis reports and so they are forcing everyone to follow a new analysis framework. When the IRS says “manage research credit issues and resources” it means audit more R&D credits.

The new changes will force every taxpayer (or their CPA) to change how they perform their analysis and give the IRS a clear road map of who they should audit. This is a complete game changer for everyone filing an R&D credit.

Form 6765 - The changes

The big change to the Form is Section F of the form. Section F asks for both project information and costing information that has never been reported on a tax form before.

Section F asks for the following information,

  1. Descriptive name for every research project
  2. Description of the information sought to be discovered AND identify one or more alternatives evaluated for each research project
  3. Classify each research project by the IRS categories
  4. Direct research wages for each research project
  5. Direct supervision wages for each research project
  6. Direct support wages for each research project
  7. Cost of supplies for each research project
  8. Cost of computer lease costs for each research project
  9. Cost of contract researchers for each research project

We cannot overemphasize the fact that all that information needs to be prepared, organized, and filed with the tax return. If there is a delay in getting this information, the taxpayer will NOT be able to file their tax return.

Accounting firms react

The accounting firms just got busted and it shows in their reactions to the proposed changes.

First reaction – they have no idea how to get this work done. They got fat charging high fees but doing no useful analysis. Now that they are faced with real work, they panic.

“Some taxpayers will be unable to complete the Form 6765" -(R&D Credit leader Big Four firm)

“Our firm proposes that we boycott the new Form 6765, the IRS can’t audit everyone” -(R&D Credit Leader Top 10 CPA firm)

Preparing the new Form 6765 is NOT possible” -(R&D Credit Leader of top 25 CPA firm)

Second reaction – as always, they fallback position is to charge higher fees but continue to do the same work.

“The new Form 6765 will increase the compliance burden” -(R&D Credit Leader Big Four firm)

“The new Form 6765 will significantly increase the administrative burden” -(R&D Credit Leader top 25 CPA firm)

Technology is the solution

CPAs are panicking because they have no practical solution to these changes. For 30+ years they have perform R&D credit studies using the same manual tools and processes. Now they simply don’t have the manpower to meet the Form 6765 requirements.

Technology is the only solution.

SPRX artificial intelligence models automate over 80% of the R&D credit tasks including preparing the new Section F of the Form 6765. As one of our competitors commented the other day;

”the R&D credit industry either has to use SPRX or, every accounting firm needs to become a technology company”.

We all know the accounting firms are not going to become technology companies over night. And even if they did, they are already several years behind in creating useful Form 6765 technology.

Recommended actions

The new Form 6765 goes into effect for the 2024 tax year. This leaves little time to evolve your processes and adopt technology so that you can timely file your 2024 tax return.

The following recommended steps should be taken soon.

  1. Review prior year R&D credit report. A quick review of your prior year R&D credit report will expose the gaps between your current process and the new Form 6765.

Many taxpayers are finding that the first requirement of providing a descriptive name for every research project is the first gap in the process. CPAs often analyze only a few “representative” projects and don’t even list all the research projects. No wonder why the IRS’s first request is a list of all the projects.

  • Identify alternatives evaluated. Historically, this information has been gathered from interviews with employees. That may have worked when you were looking at a small sample of projects. But the new Form 6765 requests this information for every project.

Advanced technology can help. Predictive AI models have been trained to take the descriptive project name and derive one or more alternatives that may have been evaluated in association with each project. Once the AI has predicted the alternatives, the responses can be quickly validated by employees familiar with the projects. Beginning this process now will provide sufficient time to predict and validate every project and adjust the models as necessary.

  • Allocate costs. The new Form 6765 requires that several costing categories be allocated to each research project. Taxpayers have not allocated costs to these categories in the past and are not clear what information will serve as a basis for these allocations.

Taxpayers are allowed to use any reasonable allocation method. However, finding a reasonable method requires balance between costing information and project information available. The first step is to identify what costing and project information is available. Then that information can be modeled through various scenarios to identify the most reasonable method for your organization.

Meet SPRX.tax

SPRX Technologies is a tech company that has developed advanced technology specific to the R&D tax credit. The core of our technology are several artificial intelligence models that replicate the best decisions of R&D credit professionals and experience IRS agents. We use these models to automate over 80% of the R&D credit tasks.

We are offering a free new Form 6765 diagnostic service to help you get prepared.

SPRX Form 6765 Diagnostic Service

SPRX is here to help you prepare close the gaps between your current R&D credit processes and the new Form 6765. To help you with the process we are offering a free Form 6765 Diagnostic.

Step 1 – Provide your prior year R&D credit report. All we need is your prior year credit report. This has all the information we need to identify the gaps in your process. After all, your report should contain all the information you need to file your Form 6765.

Step 2 – Perform assessment. We will use our advanced technology tools to rerun the data contained in your report, model the Form 6765 required data, and prepare a diagnostic report highlighting gaps between your report and the new Form 6765 requirements.

Step 3 – Deliver a diagnostic report. We will deliver our diagnostic report that will highlight gaps and recommend actions that can be taken to close the gaps. This report will provide insights into how you can evolve your current process and be prepared to timely file your 2024 tax return.

To learn more, contact your SPRX representative or visit www.SPRX.Tax

Author: Mark Andrus may be the most experienced R&D credit professional in the market today. He began his career in the early 1990s at Coopers & Lybrand and continues to serve clients today. In addition to performing thousands of client engagements, IRS exams, and post-exam negotiations, Mark helped shape the industry. Mark’s oral and written comments to proposed treasury regulations have been codified in final regulations, he worked with national IRS leaders to draft industry audit guidelines, he has trained hundreds of tax professionals on R&D credit rules and has made appearances on television and radio.

You can reach Mark with questions or comments at mark.andrus@sprx.com

Or connect on LinkedIn to see similar content at https://www.linkedin.com/in/mark-andrus/

[1] IR-2023-173, Sept. 15, 2023