In February, the IRS rolled out the new version of Form 6765 and its instructions, making it twice as long and packed with additional procedural requirements for claiming research and development tax credits. Businesses doing engineering for others or internal R&D are acutely impacted. You might have heard about these new requirements and see them as a burden, or worry these changes somehow disqualify you from getting the credits. For instance, if the IRS doesn’t like the format, would it disallow the claim on procedural grounds?

While the IRS is still accepting feedback on the instructions until June 30, 2025, the new requirements are already in effect. For companies that have traditionally handled their R&D tax credit studies in-house or used a provider solely for the purpose of calculating the numbers, the new Form 6765 means more work upfront and a higher risk if things aren’t done correctly.  That doesn’t mean businesses should shy away from claiming the credit. The qualification rules haven’t changed, and legitimate claims are still valid.  The key is preparation and, if necessary, bringing in documentation experts to build out the necessary substantiation.

Form 6765 Introduces New Risks

In theory, the new Form 6765 just asks for details that businesses should already have on hand. In reality, most businesses haven’t been tracking their R&D activities at the level of detail required by the IRS.

Before, if something was missing, there was usually time to pull the right documentation upon receiving an audit notice. The IRS would issue multiple document requests, giving businesses time to provide what was needed. Now, that window is closing. If key details aren’t included with the initial filing, the IRS can deny the claim outright. And while their own field manuals suggest taxpayers might get a 45-day grace period to fix certain issues, there’s no guarantee. Once a claim is denied for missing information, it risks being disallowed for procedural reasons, irrespective of the merits of the claim. 

In sum, this means businesses now face more risk, not because the credit itself is harder to qualify for, but because the burden of proof is shifting to the front end of the process. But again, this doesn’t mean businesses should stop claiming the credit. It just means they need to put in more effort ahead of time to ensure everything is documented properly.

Form 6765 Now Twice as Long

The latest version of Form 6765 has doubled in length, expanding from two pages to four, with instructions growing from five pages to over ten. What used to be a relatively straightforward compliance exercise has turned into a highly segmented, detailed filing that demands thorough tracking of costs, clear documentation of business components, and R&D methodologies—all before the tax return is filed.  In contrast, in the past, many companies took a reactive approach—gathering documentation after filing or usually waiting until an IRS audit. The new form forces a shift in workflow, requiring taxpayers to invest more resources upfront to tackle the tighter timeline for gathering and organizing documentation.

What’s New for 2024?

Section E - Additional Data Points for IRS’s Tax Return Review Process

The IRS has introduced Section E as part of its effort to streamline its review process and identify claims that may be incomplete or improperly documented. When a return is filed, the IRS generally sorts it into one of three categories: accepted as filed, flagged for audit, or disallowed outright due to procedural non-compliance. To make this process more efficient, the IRS now requires additional data points that could help it identify discrepancies or potential issues. 

This includes new categories of QREs identified that were previously not claimed, officer wages, acquisitions or dispositions of major trades or businesses during the tax year, the total number of business components, and whether any QREs were based on the ASC 730 directive. These disclosures won’t change how the credit is calculated, but they do require businesses to provide more when filing the claim. Section E is now required for all 2024 tax year filings.

Statistical Sampling Plans Must Be Attached (Starting with 2024) 

For businesses using statistical sampling to estimate QREs, the IRS now requires a formal sampling plan and methodology to be attached to the filing. This means taxpayers must define their methodology before submitting their return, ensuring that it aligns with IRS guidelines on its approved statistical procedures. 

This is more than just running numbers through a software program—it requires a structured approach backed by the IRS’s own standards, as outlined in Revenue Procedures 2011-42 and 2004-29. In short, the sampling plan must provide a narrative demonstrating how the company’s sampling process is IRS compliant. If the sampling plan is missing or deemed out of compliance, the IRS could disallow the portion of the claim based on sampling, which increases the risk of losing credits and possibly triggering further review. And if you are not familiar with the lower bound statistical issue, things could go badly during an IRS review.

Controlled Group Reporting Is Now More Complicated

For businesses that are part of a controlled group or under common control, the new instructions require an additional attachment, breaking down QREs by each group member. This means:

• Listing each entity’s QREs separately by category (wages, supplies, contract research, lease costs)

• Reporting how the credit is allocated across the controlled group

• Disclosing entity-specific information, such as EINs, business activity codes, and common parent details

If a controlled group files separately rather than on a consolidated return, each entity must file its own Form 6765 with this attachment. This adds complexity for businesses that previously treated their R&D tax credit calculations as a consolidated effort, making it more important to maintain well-documented records at the entity level.

Requirements in 2025

Section G - Mandatory Business Component Reporting for Tax Year 2025 Returns

The requirements increase significantly for 2025 tax returns, with Section G requiring businesses to provide a more detailed breakdown of business components tied to R&D activities. This means that while companies are busy filing their 2024 returns, they also need to review their 2025 processes now to ensure they are collecting the information necessary for next year’s filings. 

Some of the easier Section G requirements include reporting the EIN of the company conducting R&D activities by business component. A single company only needs to report one EIN, but controlled groups need to allocate projects to each company accordingly. Whether a company is standalone or part of a controlled group, each EIN must also include the principal business activity (PBA) code. The PBA means for each business component, taxpayers must specify the component type (product or process), and whether it was software-related.

Additionally, for the top 50 projects (or all projects that make up 80% of the QRES), taxpayers must, by project, break down wages into direct research, direct supervision, and direct support categories. For each of these projects, the cost of supplies, computer costs, and contract research expenses must also be separately reported.

Information Sought to Discover

Perhaps the most difficult task of Section G is describing the information sought to be discovered for each project. Those without sufficient experience with the IRS may not feel confident in wording what they do so that the IRS will recognize the validity of their claim.  The stakes are high as the IRS will likely use these answers to disqualify the entire claim or a portion of the claim without going through an audit, forcing the taxpayer to either surrender the claim or pursue an appeal.

Two types of businesses are exempted from Section G’s reporting requirements. Qualified Small Businesses that elect the reduced payroll tax credit under IRC 41(h) and businesses with $1.5 million or less in total QREs and $50 million or less in gross receipts will not be required to submit this level of reporting. However, these businesses should still expect to provide this information if audited, as the IRS is signaling that it will be closely scrutinizing small business claims. Plus, it is important to know that some taxpayers are now receiving pre-processing 45-day letters requesting this information—for many, this is not enough time, given the demands of their businesses.

No Time Tracking?

With the new requirements, labor by project must be calculated. This is somewhat straightforward with time-tracking. However, what if the business doesn’t have it? Then there are strategies that can be employed to establish a reasonable, unbiased basis of labor cost by project.  If you are not confident regarding the acceptable estimation methodology, it is helpful to have a third party with relevant experience perform this step. 

The Hidden Costs of a DIY R&D Credit Study

For businesses accustomed to managing their own R&D credit claims, the cost-benefit balance has changed. The new requirements usher in questions:

• Is my current documentation adequate to provide the information needed? If not, what gaps do I need to fill and what is the least disruptive way to do it?

• Will the IRS approve of my format for Section G documentation? In particular, will the IRS agree that our answers to what information was sought to discover are eligible R&D?

• Does this increase my likelihood of an audit?

• Given the additional documentation required before filing, does my team have the bandwidth to do everything in the compressed timeline? Do they have adequate knowledge of IRS rules to prepare this information?

Reassessing Your Approach

You may think these new requirements make the credit not worth it. 

While these changes might seem like a burden, they don’t mean the R&D tax credit is any less valuable. The IRS isn’t making it harder to qualify—it’s just requiring more upfront information so they can efficiently marshal IRS resources. For businesses conducting R&D, the credit is still there to be claimed. The key is making sure the necessary records are in place before filing so that compliance doesn’t become an issue. 

Some businesses may dedicate more internal resources to manage compliance, ensuring they collect and categorize data properly as they go. Others may find it helpful to bring in external support to review processes and/or assist with documentation. Instead of viewing these changes as a reason to back away from claiming the R&D tax credit, businesses should tackle this like all other business problems, which is to get in front of this so it is manageable. Keep in mind that stepping up what you are doing substantiation-wise will increase your level of safety should an audit ever occur.

Author Information

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, an Ohio-based tax advisory firm specializing in assisting businesses to attain and substantiate public economic incentives such as R&D and energy credits.

James Bean, CPA, is a senior researcher and R&D tax controversy specialist at Sycamore Growth Group.

Rick Kleban is the founder and president of Sycamore Growth Group, an Ohio-based firm specializing in securing economic incentives that maximize cash flow and minimize risk.