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IRS Bracing for Influx of NOL Refund Claims in 2021

Posted on Nov. 13, 2020

The IRS Large Business and International Division is anticipating a large volume of net operating loss carryback refund claims during the 2021 filing season, according to an agency official.

The uptick will come while the IRS is reducing the backlog of refund claims generated after Congress lifted restrictions on NOL carrybacks, said LB&I Commissioner Douglas ODonnell.

Speaking during a November 12 webinar hosted by the Bank & Capital Markets Tax Institute, O’Donnell gave an update on the agency’s work in processing refund claims. The IRS saw a huge spike after the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) modified section 172 to address liquidity issues arising from the COVID-19 pandemic by allowing companies to carry back losses from tax years 2018 through 2020 for up to five years before the year of the loss.

Another IRS official recently acknowledged that the agency hasn’t been able to process refund claims as quickly as it had hoped.

O’Donnell said that “there were many holdups.” Nevertheless, “We feel like we’re making good progress there, and that soon we’ll be completely out from under it and getting back to — I don’t like to use the word ‘normal,’ but to a state where we’re much more current in what we’re doing,” he said.

Claims filed via Form 1139, “Corporation Application for Tentative Refund,” have started to enter the IRS’s exam work stream, O'Donnell said.

As for the 2021 filing season, O’Donnell said the IRS expects that the number of NOL carryback refund claims will be higher among some business sectors than others.

“But broadly, we’re gearing up for what we think is going to be a large influx of claims that is going to put us into a position of having to respond quickly to those,” O’Donnell said.

To prepare, LB&I has been working to streamline its internal process for reviewing large refund cases involving the Joint Committee on Taxation, O’Donnell said. “This is the IRS side, which is the time-consuming side where we receive a claim that meets the threshold and we need to work through and understand whether or not we have any concerns with that before we send it over to JCT staff,” he explained.

Because the LB&I team that reviews those claims expected to see the volume increase as a result of the CARES Act changes, the division hired more employees, O’Donnell said.

“And we’ve streamlined the processes in ways that we think will help us be able to work much more quickly on a claim that comes in, where we look at it normally and conduct a more thorough examination,” O’Donnell said.

LB&I is also looking at ways to centralize the review so that it can make quick calls on claims that appear to be “purely an economic play,” O’Donnell said, which means the taxpayer is in a sector that experienced a significant downturn and the taxpayer saw a huge year-over-year drop in revenue.

“We can see what this is about, there’s no real technical issue, so let’s go ahead and move on this and try to move quickly into what we basically refer to as a survey of that refund request,” O’Donnell said. “That will greatly streamline the whole process, especially for the cases we have in LB&I, where they can be pretty big and complicated. So we expect that that will improve our ability to deal with what we do expect to be a significant influx of work.”

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