TAX NEWS - 2010

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IRS Tax: The IRS's Implementation of the Five-Year Net Operating Loss Carryback Claim Provisions Was Generally Effective

WASHINGTON -- The Internal Revenue Service (IRS) has been effective in the implementation of a provision in the American Recovery and Reinvestment Act of 2009 (Recovery Act) that allows eligible taxpayers to carry back a Net Operating Loss (NOL) from tax year 2008 to the prior five tax years, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

Under Federal law, a net operating loss or NOL occurs when certain tax-deductible expenses exceed taxable revenues for a taxable year. Companies and individuals who incur significant losses from business activities or natural disasters could be in a situation in which expenses and deductions exceed their income, resulting in an NOL for the tax year. Congress allows taxpayers to use the losses in one year to offset the profits of other years.

The Recovery Act extended the NOL carryback period from two years to five years for eligible small businesses, so that those suffering current economic hardships would be able to recover taxes paid in previous years. Additionally, the Worker, Homeownership, and Business Assistance Act (WHBAA) extended the provisions to include NOLs from tax year 2009 and expanded it to include eligibility for all individual and business filers.

"Overall, the IRS' implementation of the Recovery Act and the Worker Homeownership Act carryback provisions went smoothly," said J. Russell George, the Treasury Inspector General for Tax Administration. "The IRS was successful in ensuring that eligible taxpayers had the opportunity to take advantage of the tax benefit, and, for the most part, had adequate controls in place to effectively process these claims."

TIGTA found that the IRS provided timely and clear information to taxpayers related to the special provisions and also implemented the internal procedures needed to properly process these carryback claims. As of the end of 2009, the IRS had effectively processed Recovery Act NOL carryback claims for approximately 44,000 taxpayers, totaling more than $3 billion. Additionally, TIGTA found that the IRS was generally effective in implementing the changes introduced under the WHBAA.

TIGTA made no recommendations in the report.

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