The Treasury Inspector General for Tax Administration (TIGTA) found that IRS delays in processing net operating loss (NOL) carrybacks result in the IRS’s paying millions of dollars in interest unnecessarily.
According to TIGTA, the IRS pays the excess interest because it does not always process taxpayers’ amended prior returns with NOLs within the 45-day limit imposed by Sec. 6611. TIGTA’s audit of a sample of 2010 individual returns showed that 19% of NOL carryback tax abatements were not processed within 45 days.
Based on these data, TIGTA estimates that the IRS could pay $334 million in avoidable interest payments over the next five years if it does not start processing all NOL cases within the time limit. However, the IRS counters that 2010 had an unusually high number of NOL carrybacks because of a longer carryback period temporarily allowed by the American Recovery and Reinvestment Act, P.L. 111-5, a measure that is not likely to be repeated in future years. TIGTA insists it tailored its estimate to take into account the unusual volume of 2010 NOL carrybacks.
Reasons the carrybacks were not processed within 45 days included multiple reassignments of cases within the IRS, improper priority codes assigned in the IRS’s Correspondence Imaging System (CIS) (which is used to control and assign NOL cases to IRS employees), and failure to issue manual refunds when required, TIGTA said.
IRS procedures require that a manual refund be issued in any case where the NOL carryback is more than $1 million or whenever the 45-day deadline is imminent or has expired. However, 13% of the returns TIGTA sampled met the criteria for a manual refund, but no manual refund was issued. In response to the audit, IRS managers alerted employees to the importance of issuing manual refunds.
TIGTA also found that the IRS does not monitor the amount of interest paid in NOL carryback cases or its compliance with the 90-day period for processing Forms 1045, Application for Tentative Refund.
TIGTA recommended that the commissioner of the IRS Wage and Investment Division:
- Analyze CIS case reassignments to identify trends and determine the reason for the reassignments and their effect on timely case completion;
- Modify the CIS to enable a priority code to be revised or added after a case is created;
- Reevaluate the dollar ranges for the NOL carryback priority codes to verify that they accomplish their intended purpose;
- Create a process to monitor and track interest paid on carryback cases; and
- Create a process to monitor adherence to the 90-day statutory period for processing Forms 1045.
IRS management agreed with all the recommendations and plans to take corrective action.
TIGTA Rep’t No. 2012-40-111