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IRS’s Ability to Quickly Process NOL Refunds Questioned

Posted on Apr. 13, 2020

Practitioners are welcoming the IRS’s deadline extension for filing expedited refund claims of net operating loss carrybacks but wonder if the agency has the resources to quickly process them.

Given that the refund claims can be filed only via paper returns and the IRS has limited capacity to process those returns, practitioners are unsure if taxpayers will be able to get cash back as quickly as Congress intended.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) included taxpayer-friendly changes to the restrictions imposed by the Tax Cuts and Jobs Act on the ability to carry back NOLs. The CARES Act permits NOLs arising in a tax year beginning in 2018, 2019, or 2020 to be carried back to each of the five tax years preceding the tax year of the loss.

Taxpayers that need cash quickly can take advantage of the CARES Act provisions by using the IRS’s tentative refund procedures. Individuals, trusts, and estates would file Form 1045, “Application for Tentative Refund,” and corporations would file Form 1139, “Corporation Application for Tentative Refund.” The IRS generally must process those refund claims within 90 days.

Because those forms ordinarily must be filed within 12 months from the end of the tax year in which the NOL arose, it was unclear whether taxpayers with 2018 NOLs were too late. Relief came April 9 when the IRS announced in Notice 2020-26, 2020-18 IRB 1, that it is granting a six-month extension to file forms 1139 and 1045 for NOLs that arose in tax years that began in calendar year 2018 and that ended on or before June 30, 2019. 

However, claims filed via forms 1139 and 1045 may only be filed by paper. With the IRS’s Ogden, Utah, facility now closed until April 20 except for “mission-critical operations,” practitioners have expressed concerns about whether the agency has the staffing to process them within the 90-day time frame.

Sunita LoughIRS deputy commissioner for services and enforcement, said during an April 2 webinar hosted by the American Bar Association Section of Taxation that the IRS understands taxpayers’ need for liquidity and will work to process the refund claims on a “first-in, first-out basis.” She said the IRS would appreciate taxpayers’ patience as it works to process claims while ensuring employees’ safety.

An IRS spokesperson told Tax Notes April 10 that the agency is working to address taxpayer concerns.

Balancing Act

Nathan Smith of the CBIZ National Tax Office said the safety and well-being of IRS personnel “obviously is paramount, but we do need further clarification about the status of IRS operations in light of their announcement under IR-2020-68.” He was referring to an April 9 release in which the agency said that “paper returns will be processed once processing centers are able to reopen.”

“Many of our clients are pressing hard for quick turnaround on net operating loss carryback claims,” Smith said. Given the IRS’s limited capacity to process paper claims, “it is unclear whether a rush to file will accomplish anything if there is no one to sort the mail on the other end,” he added.

“The IRS’s operational status is understandable, but we just need to know whether we should be hurrying with these carryback claims,” Smith said. “We noted the IRS comment posted April 8 that taxpayers should consider waiting for further guidance on refund claims, but many circumstances for refund claims are straightforward and seemingly could be handled right away.”

Smith said he doesn’t know whether to tell clients that the IRS’s limited capacity means the refund claims will be pushed closer to the end of the 90-day time frame, or if the 90 days is now off the table.

“I understand if the IRS can’t say, but that might change things for us and our clients if they can no longer commit to the 90-day turnaround,” Smith said.

Jennifer Breen of Morgan, Lewis & Bockius LLP said that for taxpayers with cash flow problems who are trying to figure out how they'll survive the next few months, being able to get refunds within 90 days “could make a meaningful difference.”

Nevertheless, Breen said she understands the difficult position the IRS is in. “They’re doing their part to support taxpayers,” she said. “I feel like they’re working around the clock, putting out great guidance, and I do think that to the extent they can, they will” process the NOL carryback refund claims.

But the IRS has to consider the safety of the employees who will be processing claims, Breen said. “There’s a fine line they have to toe,” she said.

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