IRS backlog extends to processing NOL carryback refunds during pandemic

The Internal Revenue Service backlog is adding to long delays in processing carryback refunds of net operating losses claimed by companies during the pandemic.

A report issued last week by the Government Accountability Office found that the closure of many IRS facilities during the early months of the pandemic in 2020 led to delays in training IRS employees on how to handle the refund claims in accordance with the CARES Act. 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.

Andrew Harrer/Bloomberg

“According to officials from the Internal Revenue Service (IRS), the CARES Act changes contributed to the agency receiving 276 percent more filings for carryback refunds — which include applications for tentative refunds for net operating loss carrybacks and AMT credit refunds — in fiscal year 2021 than in fiscal year 2020,” said the report.

The IRS suffered a backlog in processing applications for tentative refunds, which businesses submit through IRS Forms 1045 and 1139. While the CARES Act and the Tax Code generally required the IRS to issue the refunds within a 90-day period, IRS 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 last November, the average time for the IRS to process all carryback refunds was 165 days.

The report acknowledged that the IRS took some remedial actions, but 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 actions to reduce the carryback backlog until April 2021, which was seven months after the agency began missing its statutory requirement.

An IRS official defended the delays as resulting from the pandemic and the sudden change by Congress in 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.

“Prior to COVID, Accounts Management met the 90-day timeframe for the majority of carryback cases,” wrote IRS chief risk officer Thomas Brandt in response to the report. “During COVID, Congress enacted the CARES Act of 2020, changing the carryback eligibility rules and making them retroactive for tax years 2018-2020. The law significantly increased carryback volumes over the prior year tax receipts. Pandemic-related evacuation orders limited normal staffing abilities and further contributed to overage. Even with an indicator to trigger when the 90-day timeframe is approaching or surpassed, the IRS would still not have been adequately resourced to prevent the overage due to the unprecedented impacts from the pandemic, the high volume of cases and limited staffing.”