The Internal Revenue Service is paying millions of dollars every year in unnecessary interest payments due to delays in processing net operating loss cases within the required 45 days, according to a new government report.
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The report, by the Treasury Inspector General for Tax Administration, examined a statistical sample of 334 of 86,483 NOL carryback tax abatements that posted to individual taxpayer accounts during calendar year 2010. The analysis found that 64 of the 334 cases examined (19 percent) were not processed within 45 days. TIGTA estimates that the IRS could pay approximately $334 million of avoidable interest payments and delay payment to more than 74,000 individual taxpayer accounts in the next five years due to delays with processing NOL cases.
When taxpayers experience significant financial losses, their deductions can exceed their income, creating an NOL that can be carried back and applied against prior-year taxes or carried forward for up to 20 years after the year the loss occurred. Interest is paid to the taxpayer if the IRS does not process an NOL case within 45 days. TIGTA initiated the audit to determine whether the IRS was processing NOL cases on a timely basis to minimize the interest payments it needs to make as well as the burden on taxpayers.
There were several reasons why cases were not processed within 45 days. Some cases had be reassigned multiple times before they were closed. Other cases were not given the proper priority code on the IRS’s monitoring and tracking system. For some cases, manual refunds were not always issued when required.
TIGTA also found that the current performance measures used by the IRS are not ensuring that NOL cases are worked in a timely manner. Neither the interest paid on NOL cases nor the 90-day statutory time period for processing tentative applications is monitored to help determine whether the IRS is processing NOL cases on a timely basis.
“This situation is costly to the government and creates a burden to taxpayers when their refunds are delayed,” said TIGTA Inspector General J. Russell George in a statement.
TIGTA made five recommendations. IRS management agreed with TIGTA’s recommendations and plans to take appropriate corrective actions. However, IRS management did not agree with the outcomes discussed in the report. The basis of the disagreement was that the calendar year from which TIGTA’s samples were drawn had an unusually high number of NOL carrybacks due to legislation that took effect for that year. The IRS believes that TIGTA’s samples were representative of what occurred in calendar year 2010, but are not representative of future years.
“This was an unusual year due to passage of the American Reinvestment and Recovery Act of 2009 and the Worker, Homeownership and Business Assistance Act of 2009, which extended the NOL carryback period from two years to five years for eligible small businesses,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Due to this change in the law, the sample is representative of what happened in 2010, but is not representative of what will happen over the next five years.”
However, TIGTA noted that because of the unusually high volumes in calendar year 2010, it adjusted its estimate using the volume of carryback transactions posted in calendar year 2011.