On the eve of turning on fax machines for processing some quick refunds, the IRS provided instructions for completing the forms that answered most of practitioners’ questions, but left some lingering concerns.
The IRS’s updated April 16 FAQ follows up on its earlier announcement that it would temporarily accept faxes of quick refund claims that stem from two provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136): alternative minimum tax credits and net operating loss deductions.
Only claims that are filed on Form 1139, “Corporation Application for Tentative Refund,” or Form 1045, “Application for Tentative Refund,” for individuals, trusts, and estates, qualify for digital transmission, which the IRS started accepting April 17.
“The eventual procedures outlined in the FAQs roughly match what practitioners had been tentatively advising, given the demand by taxpayers to file claims as soon as possible,” Shamik Trivedi of Grant Thornton LLP told Tax Notes.
“Needless to say, April 16 was a late night for most of the tax practice and procedure folks I know,” Trivedi said.
Tax practitioners welcomed the IRS’s instructions to file one Form 1139 to carry back NOLs and request 100 percent of the prior-year fully refundable AMT credit, along with the clarifications on completing the forms, according to Alina Solodchikova of RSM US LLP.
Because the current version of Form 1139 doesn’t accommodate tentative refunds for refundable prior-year AMT credits, the IRS explained how taxpayers with AMT credits should complete that form — what to enter on each line and what aspects of the current instructions to disregard.
The IRS also explained how to complete Form 8827, “Credit for Prior Year Minimum Tax — Corporations,” and identified the documents that should be filed.
The CARES Act modified section 172 to address liquidity issues arising from the coronavirus pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021.
The new law also allows taxpayers to carry back losses arising in tax years from 2018 through 2020 for up to five years before the year of the loss.
With the Tax Cuts and Jobs Act’s repeal of the corporate AMT, Congress allowed companies to offset their regular tax liability by the amount of the AMT credit. Under section 53(e), credits remaining at the end of tax years from 2018 to 2020 are refundable over several years, with the remaining amounts fully refundable for tax years beginning in 2021.
The CARES Act accelerated the recovery of the AMT credits by allowing companies to claim a refund on the remaining credits in 2018 or 2019.
Alternative Procedures Needed
Among the issues that remain after the IRS’s release of the new guidance is an information-matching requirement, Solodchikova told Tax Notes.
In FAQ No. 9, the IRS advised taxpayers to ensure that information on Form 1139 matches an originally filed return or previously amended return. “If your Form 1139 does not match your IRS account, the Form 1139 cannot be processed” because Form 1120X, “Amended U.S. Corporation Income Tax Return,” must be processed first,” the IRS said.
“This is of a huge concern to us,” Solodchikova said in an email, adding that the IRS needs to develop alternative procedures.
“This is because in certain cases where the taxpayers need to submit their Forms 1139 within 120 days of enactment of the CARES Act (June 30, 2020), their amended 2018 tax returns may not be processed in time for them to be able to file Forms 1139,” Solodchikova said.
Solodchikova suggested that the IRS could allow taxpayers to “submit a copy of the mailed Form 1120X as an exhibit and an explanation as to where the numbers are coming from.”
Ongoing Dialogue
The IRS said that if there’s missing information or if questions arise about taxpayers’ filings, the taxpayer or preparer can expect a phone call from the agency. The person listed on Form 1139 must “be able to provide the missing information and possibly authentication information,” the IRS said.
“All we hope for is that every single submission is accounted for, and once an IRS employee is assigned to review the Form 1139, he or she contacts the tax preparer with any questions,” Solodchikova said.
An ongoing dialogue will allow for processing the “tentative refund claims faster and will ultimately result in more refunds issued to businesses and individuals,” she said.
Many unknowns remain about the process, Solodchikova said, noting that many businesses are relying on those refunds to keep operating.
Dual-Item Refund Claims
Practitioners have said that taxpayers carrying back losses under the CARES Act to 2017 or earlier, during which the corporate AMT rules apply, face additional complications because there’s no tentative minimum tax beginning in 2018. That means taxpayers could have a regular tax NOL without loss carrybacks for AMT purposes, potentially creating a minimum tax liability and complicating modeling efforts.
Nathan Smith of the CBIZ National Tax Office said that FAQ No. 11 “insinuates this result.”
The IRS said taxpayers must follow the ordering rules under reg. section 5.6411-1, which means taking into account “any adjustments made in applying for the tentative carryback adjustment before determining the amount of the overpayment attributable to the 100 percent refundable minimum tax credit refund.”
The IRS warned that adjustments to AMT in the carryback years could affect the allowable refundable AMT credit in 2018.
More Faxing Opportunities?
The IRS confirmed that it won’t be establishing fax procedures for corporate amended returns but was silent on processing Form 1040-X, “Amended U.S. Individual Income Tax Return.”
Smith said he was hopeful that means something is still possible for an individual’s amended returns.
“We have already seen some of our clients racing to file Form 1040-X for 2018 to request refunds” because the CARES Act suspended the section 461(l) excess business loss limitation for 2018 through 2020, Smith said.
“The prospect of a paper-filed [Form] 1040-X sitting in a storage trailer for the foreseeable future is an unwelcome one, so it would be great if we had some alternative means to file,” he said.