IRS Will Accept Net Operating Loss Refund Claims By Fax

By David van den Berg
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Law360 (April 13, 2020, 6:31 PM EDT) -- The IRS, in response to the COVID-19 pandemic, will start accepting refund claims resulting from net operating losses for individuals, estates, trusts and corporations on forms 1045 and 1139 by fax on April 17, according to temporary procedures released Monday.

The Internal Revenue Service will accept the forms by fax because of the novel coronavirus pandemic and two provisions in the Coronavirus Aid, Relief and Economic Security Act , which temporarily lifted restrictions on net operating losses enacted by the Tax Cuts and Jobs Act , the 2017 tax overhaul. Only claims allowed under sections 2303 and 2305 of the relief bill made on forms 1045 and 1139 are eligible claims under the temporary procedures, the agency said.

Previously, the forms could only be submitted by mail, the agency said. However, all of the IRS' service centers are closed as a result of shelter-in-place orders, Sunita Lough, the agency's deputy commissioner for services and enforcement, said on a webinar hosted by the Urban-Brookings Tax Policy Center. That means mail is being held, so taxpayers should not mail in forms relating to the two provisions of the CARES Act, she said.

The release of the temporary procedures Monday follows the IRS' release of guidance Thursday implementing a provision of the recent $2 trillion COVID-19 relief law allowing businesses to carry back net operating losses for up to five years. The guidance also provided procedures for waiving an NOL from those years and to disregard certain income that would normally have been subject to the Internal Revenue Code Section 965 transition tax during the NOL carryback period. In addition, net operating losses temporarily will not be subject to a taxable income limit, which means they can fully offset income. The agency on Thursday also provided a six-month extension to file NOL forms for tax years beginning in 2018 and ending before June 30, 2019.

Starting April 17, and until further notice, eligible refund claims on Forms 1139 and Forms 1045 can be faxed to different numbers for each form, the agency said. The fax numbers will not be operational before then, according to the IRS' announced procedures. When they become operational, hard copies of forms that were for eligible claims under the CARES Act that were already mailed after March 27, when President Donald Trump signed the bill into law, can be faxed too, the agency said.

All claims, including those received before the agency's processing centers closed, will be processed in the order in which they were received, the IRS said. The agency also said it will update instructions for forms 1045 and 1139, which currently forbid their use to apply for refunds for Section 965 years. The IRS also said it plans to issue further instructions on filing requests for tentative refunds for taxpayers who have outstanding section 965(h) liabilities.

Taxpayers can now start working on their forms, reviewing books and records and determining what the refunds should be, Lough said. "And by the time you get that done we'll have the fax number ready to go," she said.

Individuals, estates and trusts file Form 1045, Application for Tentative Refund, to apply for quick refunds resulting from carrybacks of net operating losses, of unused general business credits or of net Section 1256 contracts losses, or overpayments of taxes due to claims of right adjustment under Section 1341(b)(1). Corporations other than S corporations file Form 1139, Corporation Application for Tentative Refund, for carrybacks of net operating losses, of net capital losses, of unused general business credits or overpayments of taxes due to claims of right adjustment under Section 1341(b)(1).

Section 2303 of the recent coronavirus bill, one of two the IRS highlighted, provides that a net operating loss arising in a tax year beginning in 2018, 2019 or 2020 can be carried back five years, according to a Senate Finance Committee summary. The provision also temporarily removes the taxable income limit to allow a net operating loss to fully offset income. Those changes will allow companies to utilize losses and amend returns for prior years and provide vital cash flow, according to the summary.

The other provision of the relief bill the IRS noted, Section 2305, accelerates the ability of companies to recover corporate AMT credits, allowing them to claim a refund now and get more cash flow during the pandemic emergency, according to the committee summary.

Michael Desmond, the IRS' chief counsel, appeared on the webinar with Lough and said the agency understands taxpayers have some work ahead of them.

"We recognize that there is some fairly complex computations and calculations and intersection between the NOL piece and the AMT piece of the CARES Act in particular, as well as other provisions like existing Section 965 and people that had the inclusions in 2017 and 2018," he said. "There are specific pieces, very technical pieces in the CARES Act that deal with that."

Desmond said he expects there is "more to come" on the FAQs released Monday. He said the agency's Large Business & International Division is helping to ensure there are explicitly clear instructions for taxpayers on how those pieces work together so that forms 1045 and 1139 can be prepared properly and submitted and processed quickly.

--Editing by Vincent Sherry. 

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