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IRS Backlog in Processing Net Operating Loss Claims Cost $42 Million in Interest

S.J. Steinhardt
Published Date:
Sep 13, 2022

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According to a report issued by the Treasury Inspector General for Tax Administration (TIGTA), the IRS, because of a backlog due to a lack of resources, had to pay out $42 million in interest on net operating loss (NOL) refund claims for pass-through businesses in fiscal years 2020 and 2021.

The report found that the tax agency’s backlog of unprocessed Forms 1045 increased from 900 in FY 2020 to 7,585 in FY 2021. The cases not processed by the end of the fiscal year went from 1,626 in FY 2020 to 8,974 in FY 2021. 

The agency is statutorily required to process these claims within 90 days. 

TIGTA initiated the report "to assess the IRS’s efforts to ensure individual taxpayers’ compliance with the net operating loss (NOL) provisions associated with the Coronavirus Aid, Relief, and Economic Security (CARES) Act." The 2020 law “made several modifications that temporarily repealed some of the restrictions imposed by the Tax Cuts and Jobs Act" of 2017. According to the report, "the temporary repeal gave taxpayers an opportunity to carry back losses, which were previously limited.”

According to the TIGTA report, "IRS officials stated that CARES Act changes presented a different compliance risk because they were generally more favorable to the taxpayer. As such, they believed compliance risk was not as high as in other areas and made no effort to update examination plans to ensure that taxpayers complied with the provisions of the CARES Act."

The report also found that the IRS “did not change the criteria it used to identify potentially noncompliant cases during NOL processing that would require further scrutiny by the IRS’s Examination functions despite the large volume of cases and, at times, significant losses being carried back under the CARES Act.”   

The report made four recommendations to the Lia Colbert, commissioner of the IRS's Small Business/Self-Employed Division, and to Ken Corbin, commissioner of the IRS's Wage and Investment Division: devoting additional resources to process applications for tentative refunds faster; completing the evaluation of filing tentative refunds by e-fax; developing contingency plans specific to the processing of Forms 1045; and evaluating compliance strategies to determine if they match the risks presented by the CARES Act. 

The agency accepted the first three recommendations. 

According to Accounting Today, Lia Colbert, in response to the report, said, "We diligently evaluated the audit compliance risk associated with the changes to NOL deductions with the enactment of the CARES Act, just as we did with the changes made under TCJA."

In late August, a TIGTA report found that the IRS issued refunds under the CARES Act, while not always examining the merits of certain claims, Accounting Today reported.


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