The CARES Act resurrected the carryback of net operating losses (NOL) for 2018, 2019, and 2020. An individual taxpayer has a choice in how they request a refund for a carryback NOL, and the statute of limitations applies differently depending on which alternative they choose.
They can file Form 1045, Application for Tentative Refund for a “quick refund.” The taxpayer can file Form 1045 once the taxpayer files their return for the loss year, but no more than 12 months after the loss year ends. The benefit of Form 1045 is that the IRS is generally required to process the application within 90 days.
Under IRC § 6501(k), if a taxpayer files Form 1045 to carry back an NOL, the IRS can assess tax on the carryback year while the statute of limitation for the loss year is open up to the amount of the refund.
For example, assume a taxpayer carried back a loss from 2020 to 2015 and received a $1,000 refund as a result. The IRS can make adjustments to the 2015 return until the statute of limitations runs on the 2020 return (likely sometime in 2024) and asses tax on any deficiency it finds; however, the tax assessment cannot exceed the$1,000 refund.
Alternatively, an individual taxpayer can file Form 1040-X, Amended US Individual Income Tax Return. The deadline for filing Form 1040-X is three years from the due date, including extensions, for filing the return for the loss year.
If a taxpayer files Form 1040-X, rather than Form 1045, the taxpayer will be subject to the rules under § 6501(h), which only extends the statute of limitations for deficiencies attributable to the NOL carryback. Under this rule, the IRS can assess taxes in the carryback year relating to the carryback until the statute of limitations for the loss year expires. Note that this rule is related to assessing additional taxes—the IRS can still offset the refund with adjustments to the carryback year without assessment.
Using the above example, after the statute of limitations ran on the 2015 return (likely sometime in 2019), the IRS cannot make adjustments to the 2015 return that are unrelated to the 2020 carryback; however, the IRS can reduce the $1,000 refund with adjustments to the 2015 return before paying the refund.
In closing, the material difference concerning the statute of limitations is that filing Form 1040-X extends the statute of limitations for the carryback year for deficiencies related to the carryback, and Form 1045 extends the statute of limitations for any deficiency in the carryback year up to the amount of the refund.
If you have questions about the carryback of net operating losses or any other tax-related topic, please contact me at (214)744-3700 or firstname.lastname@example.org.