NOL Carrybacks and the Statute of Limitation

With the introduction of the five-year net operating loss (NOL) carryback in IRC § 172(h) many taxpayers are now examining their tax situations to determine how to best take advantage of the new rules. However, as taxpayers evaluate their situations, they should also consider the impact that carryingback an NOL has on the assessment statute of limitation. As discussed below, carrying back an NOL unlocks years previously barred from assessment and opens the door for the IRS to potentially assess additional tax or offset refunds due.

In general, tax must be assessed within three years of the later of (1) the date on which the return is filed or (2) the unextended due date of the return (IRC § 6501(a)). There are several exceptions set forth in section 6501 that extend the general three-year limitation period. One exception is found in section 6501(h), which provides an expansion of the general limitation period when a taxpayer carries back an NOL to the tax year in question from a subsequent tax year. Section 6501(h) permits the IRS to assess a deficiency attributable to an NOL carryback deduction at any time before the expiration of the assessment limitation period for the tax year in which the net operating loss was created.

Under the extended section 6501(h) limitation period, the IRS may assess a deficiency for additional tax for the year to which the taxpayer applies the carryback if the deficiency assessed is related to the carryback claim. However, the IRS may not assess a deficiency for additional tax unrelated to the claim (see Jones, 71 TC 391 (1978)).

Where an amount has been applied, credited or refunded under IRC § 6411 (relating to tentative carryback adjustments) by reason of the carryback of an NOL to a prior tax year, section 6501(k) extends the period for assessing additional tax for the same time period provided in section 6501(h).

If an NOL is carried back using an application for tentative refund, section 6501(k) allows the IRS to assess tax in the carryback year for items related and unrelated to the carryback as long as the assessment statute of limitation for the loss year was still open. However, the total amount that may be assessed is limited to the amount of tax refunded as a result of the carryback claim. If an NOL is carried back using an amended return, then the IRS can assess a deficiency attributable to an NOL carryback deduction at any time before the expiration of the assessment limitation period for the loss year. Moreover, while the IRS may be barred from assessing a tax deficiency for adjustments unrelated to the NOL carryback deduction, the IRS may be able to offset the adjustments against the amount of the refund claim.

As taxpayers prepare refund claims to carry back their losses, it is important to consider the impact on the statute of limitation. The refund claims may unlock and open the door for the IRS to examine returns that were otherwise closed.

For a detailed discussion of the issues in this area, see “NOL Carryback Claims Can Unlock Closed Statute of Limitation Years,” by Tracey Fielman, J.D., John Keenan, J.D., Rona Hummel, CPA, and Whitney Lessman, J.D., in the March 2010 issue of The Tax Adviser.

—Alistair M. Nevius, editor-in-chief

The Tax Adviser

Also look for articles on the following subjects in the March 2010 issue of The Tax Adviser:

• An update on individual tax issues.
• State and local corporate tax developments.
• A profile of multinational businesses.

The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.