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IRS Reviews Shouldn’t Slow NOL Carryback Refunds

Posted on Oct. 2, 2020

Taxpayers looking to use a coronavirus relief provision allowing businesses to carry back losses to prior tax years don’t have to worry about their refunds getting bogged down by the IRS, according to an agency official.

The IRS’s approach to refund requests via Form 1045, “Application for Tentative Refund,” for individuals, and Form 1139, “Corporate Application for Tentative Refund,” is “refund first, ask questions later,” revenue agent William Scott, Large Business and International Division, agriculture and biofuel group, said October 1.

The Joint Committee on Taxation has a statutory requirement to review refunds greater than $2 million for individuals or $5 million for corporations. But even if a refund stemming from a provision in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) allowing for net operating loss carrybacks exceeds those thresholds, “you would still get the refund — assuming there wasn’t any major problem with the request — before any audit activity took place,” Scott said at a California Society of CPAs virtual conference on tax and accounting for farmers.

The CARES Act retroactively eliminated the excess business loss limitation in section 461(l) that was enacted as part of the Tax Cuts and Jobs Act, thus enabling businesses to carry back business losses to their 2018 or 2019 tax returns and apply for refunds.

The IRS lacks authority to waive the JCT’s statutory review requirement, so it still has to provide the JCT with a report for each of those large refunds, Scott said. “But while the report is mandatory, an [IRS] examination is not,” he said.

In some cases, the IRS can obtain the information it needs for its refund report to Congress without any taxpayer contact, and if there are no issues that need to be addressed, “we can close the case without an exam — we call that a survey,” Scott explained. He added that his office has already handled several cases that way.

LB&I had a backlog regarding these large refund reviews even before the pandemic, Scott added, but his department has since doubled the amount of staff working on them, which should speed the process up.

Asked if the IRS would put more of an audit focus on the carryback years or the year of the loss, Scott said it would depend on where the most audit risk was identified. He added that according to what he’s seen so far, “a lot of the 2018 losses are probably going to be pretty straightforward.” But he added that if audit risks that might offset some of the carryback in the earlier years are identified, he “wouldn’t hesitate to go after that.”

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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