IRS Delays Affect NOL Carryback Refund Processing

A report issued by the Government Accountability Office found that the Internal Revenue Service backlog is adding to long delays in processing carryback refunds of net operating losses claimed by companies during the pandemic. The 2020 pandemic relief law included expanded carrybacks for net operating losses and the acceleration of alternative minimum tax credit refunds. While the provision was supposed to help provide more liquidity to businesses during the financial downturn that year as COVID-19 spread across the country, delays in processing the refunds hampered those efforts.

While the CARES Act and the Tax Code generally required the IRS to issue the refunds within 90 days, the IRS suffered a backlog in processing applications for tentative refunds, which businesses submit through IRS Forms 1045 and 1139. Data indicated that the agency began to miss the 90-day statutory requirement for applications in September 2020 and missed it throughout the year. As of November 2021, the average time for the IRS to process all carryback refunds was 165 days.

Even with the IRS taking some remedial actions, it didn’t have effective preventative control activities or mitigation plans in place to detect or address the growing processing times for tentative refunds submitted on IRS Forms 1139 and 1045, such as an average processing time threshold to trigger activities to avoid missing refund deadlines. Thus, the agency didn’t take action to reduce the carryback backlog until April 2021, which was seven months after the agency began missing its statutory requirement. IRS officials attribute the delays to the pandemic and the sudden change by Congress with the rules that allowed businesses to file retroactive claims for refunds going back to 2018, as well as IRS employees being ordered to stay away from their offices for months.

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