Applying NOL Carryback to Unfiled Return

[radbrad]

Greetings. I'm catching up on prior year returns. I filed an extension and I'm preparing to file my 2017 return. I will have a large NOL that I can carry back to 2015 and 2016. I have not yet filed either of those returns yet but I'm preparing to do so. My question is: Do I have to file 2015 and 2016 and then amend them to claim to NOL Carryback? Or can I file the original returns with the NOL carry back and form 1045 Schedules A & B?

[Mike9241]

It would seem that you have lost the ability to file an NOL carryback because the 2017 return was not filed with 3 years of its due date including extensions under IRC 6511(d)

(2)Special period of limitation with respect to net operating loss or capital loss carrybacks
(A)Period of limitation
If the claim for credit or refund relates to an overpayment attributable to a net operating loss carryback or a capital loss carryback, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions thereof) for the taxable year of the net operating loss or net capital loss which results in such carryback, or the period prescribed in subsection (c) in respect of such taxable year, whichever expires later. In the case of such a claim, the amount of the credit or refund may exceed the portion of the tax paid within the period provided in subsection (b)(2) or (c), whichever is applicable, to the extent of the amount of the overpayment attributable to such carryback.

(B)Applicable rules
(i)In general
If the allowance of a credit or refund of an overpayment of tax attributable to a net operating loss carryback or a capital loss carryback is otherwise prevented by the operation of any law or rule of law other than section 7122 (relating to compromises), such credit or refund may be allowed or made, if claim therefor is filed within the period provided in subparagraph (A) of this paragraph.

[Critter-3]

@Mike9241 

Doesn't that mean that refunds on returns that old cannot be received due to the limitations  and not that they cannot carry the NOL back at all? 

Since the poster must carryback the NOL and use it up before they can carry it forward they should complete the original 2015 return & then the 2016 return using the NOL as allowed ... if there are any refunds on those returns those are forfeited however the NOL must be used and reduced by what could have been taken thus reducing the amount to be carried forward to 2018 or until completely used up. 

@radbrad 

File the original 2015/2016 returns  with the NOL ... do not file an incorrect return then add the NOL on an amended return ... that just makes double the work for the IRS (and you) and increases the chances that a data input operator will make a mistake. 

[Mike9241]

the way I read that code section is because 2017 is filed more than 3 years after its due date including any valid extensions (if the taxpayer took out a valid extension for 2017, they have until 10/15/2021 to file it and would be able to file NOL c/b claims) the NOL can't be carried back. since it would seem no valid carryforward election was made there is no carryforward either.  There is nothing that prevents the taxpayer from filing 2017 and then carrying back the NOL. the worse that can happen is the IRS rejects the c/b claims.   However, say the IRS honors the C/B claims but then realizes that the law doesn't allow it. the taxpayer will get a bill.

[Critter-3]

@Hal_Al   @Opus 17  @Anonymous_  @DoninGA 

Care to weigh in ?  

[Anonymous_]

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@Critter-3 wrote:

Doesn't that mean that refunds on returns that old cannot be received due to the limitations  and not that they cannot carry the NOL back at all? 

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That is the way I read that section of the Code; a return can be amended, at any time, to claim an NOL (carryback of course since no timely election to carryforward was made) but any refund due will potentially be barred by the applicable limitations period.

I believe this issue has been raised on this board in the past.

[Opus 17]

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@Mike9241 wrote:

the way I read that code section is because 2017 is filed more than 3 years after its due date including any valid extensions (if the taxpayer took out a valid extension for 2017, they have until 10/15/2021 to file it and would be able to file NOL c/b claims) the NOL can't be carried back. since it would seem no valid carryforward election was made there is no carryforward either.  There is nothing that prevents the taxpayer from filing 2017 and then carrying back the NOL. the worse that can happen is the IRS rejects the c/b claims.   However, say the IRS honors the C/B claims but then realizes that the law doesn't allow it. the taxpayer will get a bill.

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Going from the 2017 version of publication 536, https://www.irs.gov/pub/irs-prior/p536--2017.pdf

it appears the taxpayer has lost the ability to waive the carry back provision.  Therefore, the taxpayer must carry the loss back to 2015, then 2016, and can then carry any remaining loss forward to 2018 and so on.

In this case, the taxpayer has not filed 2015 or 2016 returns either.  That means that no refund will be paid if the loss results in a refund, but the NOL can be used to offset tax due.  

What I would do in this case is the following.

1. Prepare the 2015, 2016 and 2017 tax returns in chronological order, but don't file them.

2. Take the NOL for 2017 and carry it back to 2015 and adjust the 2015 return accordingly.  If the NOL results in a refund, it won't be paid, but it is necessary to get the NOL on the IRS' books.  If the taxpayer owes for 2015, the NOL will reduce the tax owed.  

3. Then take the remaining NOL and adjust the 2016 return.  Same rationale.

4. File the 2015, 2016 and 2017 returns by mail in separate envelopes.

5. If a 2018 return needs to be prepared, do this next, and you can continue to carry forward any remaining amount of the NOL, if anything is left. 

[radbrad]

Thanks everyone for taking the time to reply. Rereading my question it may not have been as clear so I'll try to restate the details a bit. I've prepared but not yet filed my 2015, 2016 and 2017 returns. For each year, I filed a timely extension.  The results of the original returns in 2015 are zero AGI, no NOL, no tax due, nothing withheld no refund.  In 2016, I owe less than $100, had significant income, tax and withholding.

In 2017, I have a large NOL from disposing of a bunch of rental property. The original 2017 return results in a refund of all withholding and a large NOL to carry back and forward. Since the 2017 return was due (with extension) on 10/15/2018 -- adding three years gets me to 10/15/2021. So, I think I'm still good to get the 2017 refund. And, it also looks to me like I can file a claim for refunds due to any carry back to 2015 and 2016 as long as the claims are made by 10/15/2021 -- the date the NOL is generated. Do I understand that correctly?

If that is correct, then the question is process. I realize it's too late to file a form 1045. So, the only option I found was to file an amended return. But, as I already said, I haven't filed the original yet. Hence, my original question was do I file the original and amend it? Or, should I file only one with the carry back applied to it? It seemed like filing the original and the amendment made sense because the amendment with 1045 schedules made clear what is happening. Filing an original only (with the NOL carry back figured into it) might make them think it was barred as late filed rather than understand that the refund claimed was due to an NOL carryback within the time limit for filing for the year the NOL was generated.

I hope this make sense! Thanks for all the replies!

[Anonymous_]

You will not be getting refunds for 2015 and 2016, @radbrad; those are time barred (SOL).

Regardless, according to your post, you have zero AGI for 2015, no withholding, etc., so it is not relevant. 

With respect to 2016, the NOL can be used to reduce any tax you might owe but, most likely, you will need to add penalties for late filing and interest to your tax liability for that year.

[Opus 17]

@radbrad 

Here’s the problem, and why I said to do things in the order that I suggested.

You can’t use form 1045 more than one year after the year that the loss occurred, that means your ability to use form 1045 for the 2016 refund ended December 31, 2018.

Suupose you file your 2015, 2016, and 2017 returns now. You can use the NOL to offset your tax on the 2017 return. Then you have to go back and file amended returns for 2015 and 2016 to carry back the NOL. If you have any loss left over, you can use that on your 2018 return.

You have no income or owe no tax for 2015, so the NOL won’t get used up, but you have to file to get it on paper.

Then, when you file the 2016 amended return, even though the NOL might generate a small refund, it won’t be paid because of the statute of limitations on amended returns, which applies regardless of the reason for the amendment.  That means that if you owe tax for 2016, you will pay that tax when you file your return plus penalties and interest that could double the amount you owe. Then when you file the amended return with the NOL, you will get nothing back.  However, if you include the NOL on your original 2016 return, it can zero out the tax that you owe, and if you owe no tax when you file a return, there is no penalty, even if the return is five years late.

[radbrad]

Thanks! That all makes sense *except* the SOL on the amendment. Are you talking about 26 U.S. Code § 6511 or is there some other section I'm missing? 6511(d)(2) looks like it would extend the time for a 2016 refund if it is due to a NOL carry back filed within the timeline (including extension) of the due date for the NOL loss year (2017) which for me is 10/16/2021.

[Anonymous_]

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@radbrad wrote:

Are you talking about 26 U.S. Code § 6511 or is there some other section I'm missing? 6511(d)(2) looks like it would extend the time....

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I was referring to Reg §301.6511(d)-2 and I have no idea why they do not have the extensions in there.

[Opus 17]

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@radbrad wrote:

Thanks! That all makes sense *except* the SOL on the amendment. Are you talking about 26 U.S. Code § 6511 or is there some other section I'm missing? 6511(d)(2) looks like it would extend the time for a 2016 refund if it is due to a NOL carry back filed within the timeline (including extension) of the due date for the NOL loss year (2017) which for me is 10/16/2021.

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I was not aware of that section, so possibly.  You may want to write "filed pursuant to 6511(d)(2) on top of the tax return.

Because of the huge IRS backlog, I would still want to file an original 2016 return with the NOL.  If you file an original return without the NOL tomorrow (10/6/21) and then mail the amended return on 10/15/21, things could get crossed up in the mail and cause a real headache.  Also you would still have the problem that if your 2016 return shows tax owing, you will be billed for penalties and interest, and those won't be negated by filing the amended return to claim the NOL.  And make sure you use registered mail and get proof of mailing and proof of delivery.

[radbrad]

Thanks everyone for the responses! I'm filing everything tomorrow via overnight delivery.