TIGTA: IRS pays millions in unnecessary interest on NOL carrybacks

The Treasury Inspector General for Tax Administration (TIGTA) issued a report Monday in which it found that IRS delays in processing net operating loss (NOL) carrybacks result in the IRS’s paying millions of dollars in interest unnecessarily (TIGTA Rep’t No. 2012-40-111).

According to TIGTA, the IRS pays these millions in interest to taxpayers with NOLs because it does not process their amended returns for prior years 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 NOL cases within the time limit. However, the IRS counters that 2010 was a year with an unusually high number of NOL carrybacks, due to the effects of the longer carryback period allowed by the American Recovery and Reinvestment Act, P.L. 111-5, and is not representative of what will occur in future years. TIGTA insists it tailored its estimate to take into account the unusual volume of 2010 NOL carrybacks.

TIGTA’s review found several reasons that amended returns claiming NOL carrybacks were not processed within 45 days. These included multiple reassignments of cases within the IRS, improper priority codes assigned in the IRS’s Correspondence Imaging System (which is used to control and assign NOL cases to IRS employees), and failure to issue manual refunds when required. In some cases, there were multiple causes of the delays.

IRS procedures require that a manual refund be issued in any case where the NOL carryback is more than $1 million or in any case where the 45-day period is in jeopardy or has expired. However, 13% of the returns TIGTA sampled met the criteria for a manual refund, but no manual refund was issued. TIGTA reports that after it discussed the problem with IRS management, they issued an alert to IRS employees to reinforce the importance of issuing manual refunds.

TIGTA also found that the IRS does not monitor the amount of interest paid in NOL carryback cases and does not monitor its compliance with the 90-day time period for processing Forms 1045, Application for Tentative Refund.

TIGTA made several recommendations to the commissioner of the IRS Wage and Investment Division:

1. Analyze Correspondence Imaging System case reassignments to identify trends and determine the reason for the reassignments and their effect on timely case completion;
2. Modify the Correspondence Imaging System to enable a priority code to be either revised or added after a case is created;
3. Reevaluate the dollar ranges for the NOL carryback priority codes to verify that they accomplish their intended purpose;
4. Create a process to monitor and track interest paid on carryback cases; and
5. Create a process to monitor the adherence to the 90-day statutory time period for processing Forms 1045.

IRS management agreed with all the recommendations and plans to take corrective action.

—Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.