Carrybacks, Carryovers, Statutes of Limitations, Audits, and Joint Committee on Taxation Review - Practical and Procedural Aspects of Tax Attribute Planning: Questions abound concerning the impact of the CARES legislation.

• Date: 01 November 2020
• Author: Dimopoulos, Jason

The COVID-19 pandemic has had wide-ranging effects. The Coronavirus Aid, Relief, and Economic Security (CARES) Act legislation, signed into law on March 27 in response to COVID-19, has reshaped the tax landscape as we know it. Gone, for example, are the restrictions imposed on carrying back certain tax attributes, including net operating losses (NOLs), for certain tax years following the enactment of the Tax Cuts and Jobs Act (TCJA). The CARES Act also provides liquidity to taxpayers in great need of that liquidity. Yet this provision of liquidity has raised many questions.

Will carrying back certain tax attributes to years that are otherwise closed for assessment of tax "reopen" those years to tax assessment? If so, to what extent? What is the likelihood of an Internal Revenue Service audit if a taxpayer carries back an NOL that exceeds the threshold for review by the Joint Committee on Taxation (JCT)? Will the IRS be more likely to audit and identify issues that may arise in a carryback year? How long does the JCT take to review a claim for refund, whether a tentative claim or otherwise? Can taxpayers rely on IRS guidance in the form of FAQs (frequently asked questions) related to the provisions of the CARES Act so as to protect themselves against penalties, among other purposes?

These questions, both timely and relevant, are of course particularly crucial to taxpayers that have sought to leverage the benefits afforded by the CARES Act. This article attempts to address these and other questions that have emerged in the wake of the CARES Act.

The Challenge: Reducing Audit Risk While Enhancing Loss Utilization

Prior to the enactment of the TCJA in 2017, Section 172 generally allowed taxpayers to carry back NOLs up to two years and to carry NOLs forward up to twenty years to offset taxable income in the carryback and carryforward years. The TCJA, however, amended Section 172(b)(l)(A)(i) by, in part, prohibiting taxpayers from carrying back their losses to prior years for tax years beginning after 2017. Taxpayers were, however, allowed to carry forward NOLs indefinitely. Amended Section 172(a) of the TCJA further capped a taxpayer's NOL deduction at the lesser of 1) the aggregate of NOL carryovers to the tax year, plus NOL carrybacks to the tax year, or 2) eighty percent of taxable income computed for the tax year without regard to the NOL deduction allowed for the tax year.

In an effort to boost taxpayers' liquidity, the CARES Act changed these provisions with respect to NOLs arising in tax years beginning after December 31, 2017, and before January 1, 2021. Specifically, Section 172(b)(l)(D)(i) of the CARES Act generally permits taxpayers to carry back NOLs arising in these years to each of the five tax years preceding the tax year of the loss. This provision is particularly valuable given that taxpayers can carry back NOLs from a twenty-one percent tax year to a thirty-five percent tax year, thus reducing the applicable tax rate in the carryback year by fourteen percent. The CARES Act further eliminated the eighty percent of taxable income limitation on deductibility for NOLs carried over or carried back to tax years beginning before January 1, 2021.

Many taxpayers have either applied or plan to apply these new NOL provisions of the CARES Act. Specifically, many taxpayers filed Forms 1139 (Corporation Application for Tentative Refund) and Forms 1045 (Application for Tentative Refund) by the July 15, 2020, deadline with respect to their 2018 tax years. Many taxpayers have already received the refunds requested in those claims. The story, of course, does not end with the IRS' issuance of a tentative refund. Despite the fact that the IRS is obligated to issue the tentative refund provided there are no significant computational errors--and is obligated to do so even with respect to refunds that exceed the threshold for JCT review, pursuant to Section 6405(a), $2 million for individual taxpayers and $5 million for C corporations--the IRS may later examine the propriety of the claimed refund. While such an examination is more likely where claimed refunds exceed the JCT review thresholds, nothing prevents the IRS from examining refunds that fall below those...