Corporations have been receiving refunds from carrying back net operating losses, but those taxpayers with alternative minimum tax implications in that carryback year might need to check those refunds twice.
“Clients are receiving refunds particularly on more straightforward filings” of Form 1139, “Corporation Application for Tentative Refund,” Kirsten Wielobob of EY said June 26 during her firm’s webinar.
However, there’s been some confusion at the IRS on the more complex submissions, particularly for calendar-year taxpayers with AMT credits included on the form, said Wielobob, a former IRS deputy commissioner for services and enforcement.
Many employees handling quick refunds are new, Wielobob said. “While we heard folks with training on more complex issues are helping, it’s still possible that the IRS gets confused or makes a mistake,” she warned.
The IRS has been temporarily accepting faxes of quick refund claims that stem from two provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136): AMT credits and NOL deductions.
Only claims that are filed on Form 1139, or on Form 1045, “Application for Tentative Refund” — for individuals, trusts, and estates — qualify for digital transmission, for which the IRS has provided informal guidance through a series of FAQs.
The IRS generally conducts a limited examination of those applications and makes the resulting refunds within the statutorily required processing time of 90 days. The agency has said it is “working to process these refunds as quickly as possible, with limited staffing, managing the volumes and adjusting to processing these refunds in a remote work environment.”
In a June 29 Q&A update, the IRS confirmed an official’s statement in April that the six-month extension under Notice 2020-26, 2020-18 IRB 1, to file tentative refund claims for taxpayers carrying back an NOL arising in a tax year that began during the calendar year 2018 and ended on or before June 30, 2019, applies to consolidated groups.
In new Q&A No. 20, the IRS said a taxpayer — including one that filed a consolidated return or had a short tax year for the applicable loss year — filing Form 1139 or Form 1045 that is due on or after April 1 and before July 15, including as a result of the relief provided in Notice 2020-26, “is an affected taxpayer performing a specified time-sensitive action, and will have until July 15, 2020, to file the relevant form” under Notice 2020-23, 2020-18 IRB 742.
Source of Confusion
In separate guidance issued in May — a list of Q&As — the IRS explained the treatment of NOL carrybacks of C corporations to tax years in which the AMT applies.
This is an area of “heightened interest,” William Pauls of Deloitte Tax LLP said June 25 during his firm’s webcast. Pauls said that’s because the AMT continues to apply for pre-2018 tax years and “corporate taxpayers have correctly asked whether the amount of the alternative tax net operating loss deduction for any such carryback year may be impacted by the carryback of a net operating loss arising in 2018, 2019, or 2020.”
“Given different viewpoints and disparate outcomes,” formal guidance would be welcome, Pauls said.
The CARES Act modified section 172 to address liquidity issues arising from the COVID-19 pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021.
The law also allows companies to carry back losses arising in tax years from 2018 to 2020 for up to five years before the year of the loss.
With the Tax Cuts and Jobs Act’s repeal of the corporate AMT, Congress allowed companies to offset their regular tax liability by the amount of the AMT credit. Under section 53(e), credits remaining at the end of tax years from 2018 to 2020 are refundable in an amount equal to 50 percent of the excess of the AMT credits over the regular tax liability for the tax year. Remaining amounts of AMT credits are fully refundable for tax years beginning in 2021.
The CARES Act accelerated the recovery of the AMT credits by allowing companies to claim refunds on the remaining credits in 2018 or 2019.
According to Q&A No. 1, if a C corporation is carrying back all or a portion of a post-2017 NOL to a pre-2018 tax year in which AMT rules apply, the AMT NOL in the post-2017 year is treated as zero for amended returns or for purposes of a Form 1139 filed on or after June 1. For those returns, if the taxpayer uses a different method to determine the AMT NOL, its refund may be delayed.
As a result of an NOL carryback, the C corporation likely has an AMT liability in a pre-2018 carryback year or has released minimum tax credits under section 53 in that year because it no longer has enough regular tax liability to use them.
If the corporation made an election under section 53(e)(5) to recover 100 percent of its AMT credits as refundable credits in its tax year beginning in 2018, it may claim both the NOL carryback and the minimum tax credit refund for 2018 on the same Form 1139. Also, the IRS allows taxpayers to claim both the NOL carryback and the refunds resulting from AMT credits offsetting their regular tax liability on the same form.
Different procedures apply for claiming refunds depending on the taxpayer’s circumstances, and some processes might be quicker than others, albeit likely slower than the processing time before the pandemic.
Taxpayers amending returns by electronically filing Form 1120-X, “Amended U.S. Corporation Income Tax Return,” can use the temporary fax procedures for Form 1139 using the amended amounts, but the IRS won’t be able to process the tentative refund application until the amended return has been processed and reflected in the taxpayer’s account.
Under section 6425, corporations that overpaid their 2019 estimated taxes can apply for a quick refund via Form 4466, “Corporation Application for Quick Refund of Overpayment of Estimated Tax,” if the adjustment amount is at least 10 percent of the estimated income tax liability. Corporations must file the form after the end of their tax year, and no later than the due date for filing the corporation’s tax return, not including extensions.
The processing of Forms 4466, which must be filed by mail, “still seems to be moving very, very slowly,” Wielobob said. The mail is being opened, “but we’re not aware of authentication letters going out to any great extent,” she said, explaining that a Letter 1287C must be issued and responded to before the IRS can pay those refunds.
The statute requires the IRS to determine the adjustment within 45 days of the taxpayer’s filing the form unless the agency deems it impractical to do so.
Nearing the Finish Line
Describing the situation at the IRS as it deals with the pandemic, Wielobob said, “The finish line [is] in sight, but we are not quite there yet.”
Wielobob highlighted the government’s recent announcements concerning its continued phased reopening and noted that July 15 brings an end to the IRS’s People First Initiative. That means resuming new examinations; collection efforts, including private debt collection; and other activities, such as passport certifications for delinquent tax debt, she said.
Telework continues at the IRS, and for those employees who have returned to the workplace, work practices have been adjusted for social distancing, including the use of swing shifts, Wielobob said. “We learned that one of the reviewers for Forms 1139 is actually working a 4:30 p.m. to 1 a.m. shift,” she said.
“Phone lines are hit or miss,” Wielobob said, adding that she hopes “that improves over the next several weeks, but there is pent-up demand, and the postponed July 15 deadline is approaching.”
Regarding the IRS’s progress tackling its backlog of 11 million pieces of unopened mail, Wielobob said she’s “been fascinated by the use of mail opening as a metric.”
“Yes, the mail is opened, but then it needs to be logged in and worked. To me, it’s sort of a clog in a pipe that just is getting pushed farther down the pipe, but I’m going to say progress is progress and declare a small victory.”
Sunita Lough, IRS deputy commissioner for services and enforcement, said on June 18 that the IRS is receiving 1 million new pieces of mail per day and opening 5 million pieces of mail per week.
Learn more at the American Institute of Certified Tax Planners.
Written by Emily L. Foster