Net operating loss and the IRS.

• Author: Miller, John L.

Recent legislation has amended Sec. 172(b)(1)(H), which gives taxpayers an ability to carry back a net operating loss (NOL) for a period of three, four, or five years to offset taxable income in those preceding years and obtain refunds of taxes paid. The IRS's ability to make adjustments to the affected returns is an important consideration for taxpayers when deciding whether to make the carryback election and how many years to include. This item focuses on the procedures for filing returns, the IRS examination policy and procedures, and implications to be aware of.

Seeking a Refund Based on an NOL Carryback

Taxpayers can apply for a refund based on a loss carryback by either filing an amended return or filing an application for tentative refund on the appropriate forms. Generally, a taxpayer must file an application for a tentative refund no later than 12 months after the close of the tax year in which the NOL was incurred. For example, the taxpayer must file the application for a tentative refund for a NOL incurred during a calendar year by December 31 of the following year. The IRS has issued guidance in the form of two revenue procedures that provide rules for filing the appropriate forms under the legislation. Taxpayers filing as an eligible small business (ESB) should review Rev. Proc. 2009-19 (as modified by Rev. Proc. 2009-26), and taxpayers with NOLs arising in tax years ending after December 31, 2007, and beginning before January 1, 2010, should consult Rev. Proc. 2009-52 for rules related to making the election and when to file the application.

The obvious advantage of filing an application for tentative refund, as compared with filing an amended return, is that the IRS must process a tentative refund within 90 days of receipt, provided the application is prepared correctly and contains no material errors. The amount requested in a tentative refund claim is paid prior to an examination, even if the amount of the requested refund is in excess of $2 million (the statutory amount subject to review by the Joint Committee on Taxation (JCT)). However, amended returns are claims for refund and are therefore subject to IRS scrutiny before payment of the refund. These returns can be examined or accepted as filed but may require JCT review prior to the payment of any refund. The examination process can last for more than a year, depending on the span and scope of examination activity.

Examination of NOL and Carryback Years

Depending on the...