IRS Extends Time to Request NOL Tentative Carryback Adjustment
In our client alert published on April 1, available here, we discussed how the CARES Act reinstated taxpayers’ ability to carry back net operating losses (“NOLs”) in tax years beginning after December 31, 2017 and before January 1, 2021 (i.e., for calendar year taxpayers, 2018, 2019 and 2020) to the five prior years, and thereby obtain a refund of taxes paid in those prior years. The ability to carry NOLs back to prior years had previously been eliminated by the Tax Cuts and Jobs Act enacted in 2017 (the “2017 Tax Act”). In addition, the CARES Act permits such NOLs to be carried back five years, in contrast with the two-year carryback period that had previously been allowed before the enactment of the 2017 Tax Act.
As discussed in our earlier client alert, Code Section 6411 permits what is known colloquially as a “quickie” tentative refund procedure. Through the “quickie” refund procedure, a taxpayer may apply for a tentative refund of taxes paid in a prior year based on a tentative NOL carryback, and the taxpayer’s request would be subject to a limited initial review by the Internal Revenue Service (“IRS”) with the goal of issuing the tentative refund within 90 days. The “quickie” refund would then be subject to further review by the IRS in the normal course of its activities. We noted in our earlier alert that, while the window within which to make a request for such “quickie” refund for the 2019 tax year was still open, the time period within which to request a “quickie” refund for the 2018 tax year had expired.
On April 9, 2020, the IRS issued Notice 2020-26 to remedy this situation with respect to 2018 NOLs. Pursuant to the Notice, the IRS granted a six-month extension to file applications for a tentative carryback adjustment under the “quickie” refund procedure for NOLs that arose in tax years that began in calendar year 2018 and that ended on or before June 30, 2019. As a result, a taxpayer that generated an NOL in such prior tax year has until June 30, 2020 to file for a “quickie” refund. For individuals, trusts, and estates, the refund would be requested by filing IRS Form 1045. Corporations may apply for a refund by filing IRS Form 1139. Taxpayers are instructed to include on the top of the applicable form, “Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment.”
The IRS also issued on April 9 Revenue Procedure 2020-24, which addresses the manner in which taxpayers may elect to waive the carryback period for net operating losses generated in 2018, 2019 and 2020. The Revenue Procedure specifies that a taxpayer may elect under Code Section 172(b)(3) to waive the carryback period for a NOL arising in a taxable year beginning in 2018 or 2019 no later than the due date, including extensions, for filing the taxpayer’s U.S. federal income tax return for the first taxable year ending after March 27, 2020 (i.e., for calendar year taxpayers, on the 2020 tax return, which will be filed in 2021). The taxpayer may make this election by attaching to its U.S. federal income tax return filed for the first taxable year ending after March 27, 2020 a separate statement for each of taxable years 2018 or 2019 for which the taxpayer intends to make the election. Once made, the election is irrevocable.
Revenue Procedure 2020-24 also provides specific guidance for multinational businesses that are subject to the one-time transition tax imposed on certain U.S. shareholders’ share of a foreign corporation’s deferred earnings and profits under the 2017 Tax Act. Revenue Procedure 2020-24 permits taxpayers that are subject to those rules to waive the carryback of NOLs to transition tax years (in which case taxpayers may instead, for example, apply foreign tax credits against such income that might otherwise not be available).
These recent actions taken by the IRS are designed to help taxpayers obtain prompt financial relief. However, given the strain on IRS resources resulting from the COVID-19 crisis (which has resulted in reduced capacity of most IRS service centers and delays in processing tax returns), the prospects of achieving expedited treatment are subject to considerable doubt.
To discuss how the provisions described above may affect your business, please contact the tax professionals of Arent Fox LLP.