The taxpayer applying the NOL may be entitled to Earned Income Tax Credit (EITC), additional EITC, or Additional Child Tax Credit (ACTC) on one or more gain years, due to the decrease in AGI that now qualifies the taxpayer for one or both of these credits.

The taxpayer must provide Schedule EIC for EITC if the taxpayer did not previously qualify for EITC, but now qualifies due to the change in AGI. See IRM 21.6.3.4.2.7.10, EITC Claims. Schedule EIC is not needed if the taxpayer previously claimed EITC and the EITC amount is simply being increased due to the change in AGI. Schedule EIC is also not required if the EITC is for self only with no qualifying children.

The taxpayer must file Form 8812 for ACTC. Form 8812 is not required if the CSR/TE can "dummy in" the form and arrive at the figure the taxpayer is claiming. If the CSR/TE cannot arrive at the same figure, Form 8812 is required. See IRM 21.6.3.4.2.8.2, Form 8812, Adjusting the Account, for additional information.

CREDIT INTEREST ISSUES - If additional EITC or ACTC is allowed:

PENALTIES AND DEBIT INTEREST ISSUES - If additional EITC or ACTC is allowed, and a gain year module contains any assessed or accrued penalty or interest charges (as shown in the bullets below), you must manually compute and assess the penalties and interest as part of the NOL adjustment. Otherwise, Master File will allow the credits from the gain year due date and erroneously recompute previously assessed penalty and interest charges.

EXAMPLE - Below is the account transcript data of a late filed 200512 individual tax return. The return due date is 04/15/2006 (no extension was filed). The late filed return was received on 09/17/2006. Since the return was filed late and was not full paid by the original return due date, failure to file, failure to pay, and interest charges were assessed when the return posted on 10/02/2006. Additional FTP and interest charges continue to accrue. A NOL application was filed on 05/15/2008 for losses incurred on a timely filed 200712 tax return. The NOL application included EITC in the amount of $500 as part of the 200512 gain year adjustment. The CSR/TE who input the NOL adjustment addressed each of the penalties and the debit interest. Otherwise, Master File would have incorrectly recalculated them by using the gain year due date (04152006) as the available date for the $500 of EITC.

Reducing the AGI never decreases the taxpayer's EITC or ACTC.

In general, for non-community property states, the taxpayer must file an allocation schedule if he or she changes marital status, filing status or spouses in any carryback gain or loss year. For non-community property states, accept the allocation provided by the taxpayer. See Exhibit 21.5.9-2. For processing procedures on over tolerance claims, see paragraph (4) below.

An allocation schedule is not required if the income, deductions, and NOL are split 50-50 in the following community property states:

The allocation schedule may be provided and deemed appropriate in community property states if the taxpayer has income from separate property that is not treated as community property, or if the taxpayer provides reasonable evidence that the parties must allocate their loss pursuant to stipulation or decree approved by the state court. The allocation schedule must properly show which income, deductions, withholding, tax liability and refund belongs to each spouse. A signed statement that loss belongs to other spouse is needed.

If both taxpayers were not married to each other during the gain year:

Use the following steps when a person (the loss year spouse) carries a NOL back to a taxable year, in which that person filed a joint return with a former spouse.

IF the taxpayer's spouse without the NOL is entitled to a refund:

Any reassessments must be made against the spouse who received the refund:

The taxpayer calculates Alternative Minimum Tax (AMT) on "Tax Preference Items," or benefits received from deductions, lower tax rates, and exclusions from tax.

An NOL carryback may increase or decrease the amount of AMT owed.

A carryback of most general business credits does not decrease the amount of AMT owed. See IRC § 38(c) for exceptions.

A carryback of foreign tax credit can increase the amount of AMT owed.

Ensure the taxpayer reporting or changing AMT has attached the following, unless the examiner can verify AMT through IDRS, CFOL research, etc.:

This Section outlines the procedures for Estates and Trusts claiming NOL carrybacks by filing:

The estate, trust, or organization must compute the NOL on a separate schedule and attach it to the claim or application.

Exempt and charitable organizations may claim a net operating loss and net operating loss deduction, subject to the restrictions in IRC 512(b)(6),using:

Expedite carryback claims and applications, involving Exempt Organizations, to the Ogden Campus within 3 days of Accounts Managements function received date.

See IRM 21.3.6, Forms and Information Requests, and IRM 21.7.7.4.16.8 , Form 990-T Employee Plan (EP) Claim Procedures , for more information.

The Ogden Campus processes carrybacks filed by exempt and charitable organizations.

The Ogden Campus processes TENTS in the Accounts Management function to meet the 90 day processing requirement. See IRM 21.7.7.4.16.8.3, Form 1139 Claims for Employee Plans (TENTS).

When computing the NOL, the estate or trust exclude the following:

The allowable deductions for estates and trusts are:

Like individuals, estates and trusts cannot include a Net Operating Loss Deduction (NOLD) from another year or use a net capital loss (NCL) to increase an NOL.

Treat the estate or trust as an individual when applying the NOLD to the carryback years and computing the "intervening year modifications" . Use Form 1045, Schedule B.

If the NOLD is fully absorbed in the earliest gain year, no intervening year modifications are required:

If the NOLD is not fully absorbed in the earliest gain year, add back "intervening year modifications" to recompute the taxable income in each affected gain year.

Beneficiaries of an estate or trust can use excess NOL on their individual returns, at the termination of the estate or trust. Beneficiaries claiming the NOL on their individual returns can only carry the NOL forward.

Verify the NOL computation, using Schedule A (Form 1045) and the computations above.

A separate "estate" is created when an individual debtor files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code. After that, the individual debtor and the bankruptcy estate are treated as separate taxable entities, and, either one, or both, may have carrybacks.

An individual debtor with non exempt assets, may choose to end his or her tax year the day before filing the bankruptcy case, using:

A trustee in bankruptcy or the debtor in possession may identify an NOL or unused credit when filing Form 1041 on behalf of the Bankruptcy Estate. The trustee or debtor must sign Form 1041 and attach a copy of the Form 1040 showing the estate’s income, deductions, credits, etc. The trustee or debtor may file either Form 1045 or Form 1040X (normally with Schedule A of Form 1045 as a worksheet) to claim the carryback. See Publication 536, Net Operating Losses for Individuals, Estates, and Trusts.

A bankruptcy estate computes taxable income the same way as an individual:

If any gain year of the estate is a taxable year before the estate's first taxable year, the gain year is taken into account for the debtor's taxable year corresponding to the carryback year. See IRC § 1398 (j)(2)(a). Therefore, a carryback from the estate's activities is the only one that can be carried back and used against the debtor's pre-bankruptcy years.

The debtor cannot carry back to a taxable year before the debtor's taxable year in which the case commences any carryback from a taxable year ending after the case commences. Therefore, a separate carryback from the debtor's non-estate activities can only be carried back and used against the debtor's post-bankruptcy income.

Upon "termination" of the estate (termination is not defined in the code or regulations), the debtor succeeds to and takes into account certain tax attributes of the estate under section 1398 (i), including NOL and credit carryovers.

When you process these returns, if an account has a -V and/or -W freeze, and an indicator (TC520 with closing codes 60-67, 81, 83, or 85-89), contact the Insolvency Unit before making the adjustment.

Net Operating Loss Deduction (NOLD) is the net operating loss deducted against income on other tax years (gain years).

Apply the NOLD as a business deduction, even if taxpayer did not have business income that gain year. The NOLD offsets income from all sources including capital gains, in excess of capital losses.

The NOLD is fully absorbed in a gain year when:

When recomputing taxable income and tax liability, subtract the NOLD from the Adjusted Gross Income (AGI). Recompute any income or deduction based on, or limited to, a percentage of the adjusted gross income or modified adjusted gross income, after applying the NOLD such as:

When the NOL is not fully absorbed, compute modified taxable income for each affected gain year. Modified taxable income determines how much NOL is absorbed in a gain year and how much remains to be carried to a later year.

When recomputing taxable income and tax liability:

When an NOL is not fully absorbed, compute modified taxable income in each affected gain year. Modified taxable income determines how much NOL is absorbed in each year.

If an NOL occurs in more than one year, the earlier loss year is deducted before the later loss.

For individuals, capital losses in any year are deductible to the extent of capital gains, plus a limited amount of ordinary income ($3,000 Married Filing Joint, or $1,500 Married Filing Separately). Any excess is a net capital loss (NCL).

Carry the NCL forward only (not back) on an IMF return. For an election to carry back losses from IRC §1256 contracts, See IRM 21.5.9.5.45.

A capital loss retains its character as short-term or long-term when it is carried forward. The Schedule D instructions provide a worksheet for computing the amount of the NCL carryforward. The carryforward is combined with other capital gains and losses in the carryforward year. If the combined net losses exceed the deduction limit in that year, there is a NCL carryforward to the following year.

Corporations may carryback a capital loss only to a year with a capital gain, to the extent of the gain. Combine the loss with all other capital losses in the carryback year until they offset any capital gains for that year. Carryback the NCL before the NOL.

The amount carried back cannot cause or increase an NOL in the carryback year.

Unused losses may be carried back three years and forward five years. Losses not deducted in the carryback and carryforward years are forfeited.

For tax years beginning on or before December 31, 2004, the net capital loss of a corporation cannot be carried back to any year the corporation is a:

For tax years beginning after December 31, 2004, the net capital loss for a corporation cannot be carried back to any year the corporation is a Real Estate Investment Trust (REIT), or a regulated investment company.

A taxpayer may file for a refund based on a "Claim of Right" adjustment on Form 1045 or 1139 (whether or not the claim is related to a carryback) in order to be eligible for 90 day processing. The taxpayer only enters:

Follow instructions in IRM 21.6.6.4.9, Repayments of Debt Cancellation/Claim of Right - IRC Section 1341.

Attach Form 1045 or Form 1139 as the source document.

A Claim of Right adjustment for a year may result in an NOL for that year or an NOL or NCL for a prior year. Carrybacks and carryforwards prior to the year of the adjustment are taken into account in determining the amount of the adjustment. Normal rules apply for carrying forward any unused NOL or NCL past the year of the adjustment.

This section provides procedures for processing Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. Corporations file Form 1138 to extend the time to pay tax for the preceding year, if a net operating loss is expected in the current year.

The extension applies to tax required to be paid after the filing of Form 1138. The payment of tax that may be postponed cannot exceed the expected overpayment from the carryback of the NOL.

In general, the extension for paying the tax expires at the end of the month in which the return for the tax year of the expected NOL is required to be filed (including extensions). The corporation can further extend the time for payment by filing Form 1139, Corporation Application for Tentative Refund, before the period of extension ends. See Example in Paragraph (4).

EXAMPLE:

Corporations may also file Form 1138 to defer collection of an amount assessed as a deficiency, interest, or penalty, if Form 1138 is filed after the return due date. In that case, Form 1138 must be filed within 21 calendar days after notice and demand for payment was made (the date the first CP notice is generated notifying taxpayer of the amount due), or within 10 business days if the amount for which the notice and demand for payment was made equals or exceeds $100,000.

Carrybacks do not reduce the net amount due for purposes of calculating Failure to Pay (FTP) penalty. See IRM 20.1.2.1.10, Carrybacks and Carryovers. The filing and acceptance of Form 1138 does not affect the calculation of the FTP penalty.

Interest is charged on postponed amounts from the date that the payments would normally be due.

Reject Form 1138 if:

Suspend the Form 1138 if the gain year has not been processed. Push code the 1138 to the gain year return, and return to the CSR. When the push code is returned, follow the instructions in Paragraph (10).

Process Forms 1138 using the table below.

A TC 470 CC 98 (W- freeze) is released by any of the following actions.

In order for the taxpayer to get the further extension noted in Paragraph (3), Form 1139 must be filed by the end of the month in which the loss year return is due (including extensions). Otherwise, the extension to pay the prior year tax expires on that date (see paragraph (4) above). Monitor the loss year for receipt of Form 1139 by the required date. Follow the instructions in the table below.

This section provides procedures for working applications for tentative refunds (TENTS). Taxpayers file carryback TENTS using these forms:

When processing Form 1045, consider the following:

When processing Form 1139, consider the following:

Forms 1045 and 1139 have a 90-day processing requirement. To meet this legal requirement, the adjustment must be input by the time frames below.

TENTS have a 45-day interest-free period. See IRM 21.5.9.5.32.

Taxpayers filing for a TENT must file the application within one year from the end of the loss year (e.g., 200812, on or before Dec. 31, 2009).

Unique transaction codes and blocking series are used to adjust TENTS.

Transaction codes which identify TENTS are:

Blocking series which identify TENTS are:

TENT adjustments require input of the interest start date (INT-COMPTN-DT) and carryback received date (TCB-DT).

The INT-COMPTN-DT determines the date that credit interest begins on the overpayment. The TCB-DT determines the expiration date of the 45–day interest-free period.

Credit (overpayment) availability date depends on the loss year return received and processing dates:

See IRM 20.2.4.7.2.3, Interest, 45-day Rule and Amended Returns and Claims (OBRA 1993). (This does not apply to RINTS.)

Process Forms 1045 and 1139 and allow the refund(s) prior to routing TENTS with the following criteria to Examination:

Process the TENT and forward the case to the campus where the parent corporation filed, if Form 1139 for a subsidiary corporation meets Examination criteria.

If taxpayer checked "yes" to the question, "Have you filed a petition in tax court for the year or years to which the carryback is to be applied?" , process the TENT and notify the Appeals Office.

All large dollar and Joint Committee Cases must be expedited due to interest considerations. Refer to IRM 21.4.4.4, Preparation of Manual Refund Forms, for additional information on million dollar or more refunds.

TENTS can be reassessed without Examination deficiency or erroneous refund procedures.

Write ( Letter 449C) or call taxpayer for a complete signed copy of any unfiled loss year return. Forward the received loss year return for processing.

If the loss year return is not received, or does not support the application, reassess ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

In general, the status of the corporation(s) i.e., status as a standalone corporation, a subsidiary member of a consolidated group, or an agent for the consolidated group (which could be either the common parent or a designee, a substitute agent for the group) for the carryback year determines the corporation which is responsible for filing the Form 1139.

Specifically, with regard to a consolidated group filing an application for a tentative carryback adjustment, the appropriate agent to act for the consolidated carryback year is responsible to file the tentative carryback application for any consolidated net operating loss carryback, any consolidated capital loss carryback, or any carryback of an unused consolidated business credit, per IRC § 6411.

For a NOL, capital-loss, or business credit carryback arising in a consolidated return year (that is, the loss arises in a consolidated group tax year) where the loss is being carried back to:

For a consolidated return year of another consolidated group for the carryback year (i.e., not the consolidated group that generated the loss carryback), then the common parent of the consolidated group for the carryback year is responsible for filing the Form 1139. However, the amount of such refund, via the carryback, may be limited under Treas. Reg. Section 1.1502-21(c). Further, such carryback may be waived by the consolidated group that generated the loss under Treas. Reg. Section 1.1502-21(b)(3)(ii)(B).

When the NOL arises in a separate return year (i.e., not a consolidated return year) and the loss is being carried back to a consolidated return year, the common parent of the group (or the designated substitute agent) for the carryback year is responsible for filing the Form 1139 for the loss.

A Personal Service Corporation (PSC) with an IRC § 444 election, allowing it to have a tax year other than the required calendar year, is not allowed an NOL carryback. PSC's that do not have Section 444 elections in effect may carryback their NOL's, but not to a taxable year for which a Section 444 election is in effect.

IRC § 444 filers are identified on ENMOD with TC 054/055, Filing Requirement Code 19. Contact taxpayer if necessary, to confirm the corporation is not a PSC Section 444 filer, before allowing adjustments.

If taxpayer is not a PSC Section 444 filer:

If taxpayer is a PSC Section 444 filer, but is allowed the carryback on years prior to the Section 444 election:

This Section outlines procedures for working restricted interest claims. Taxpayers file carryback RINTS using these forms:

Certain conditions and requirements separate RINTS from regular amended returns:

The loss year return must be posted to Master File. See IRM 21.5.9.4.2.

RINTS have a 45-day interest-free period. See IRM 21.5.9.5.11.

RINTS can be identified by unique transaction codes and blocking series.

Unique adjustment transaction codes identify RINTS, which generate interest from the interest computation date. They are:

Unique adjustment blocking series identify RINTS. They are:

RINT adjustments require an input of the interest start date (INT-COMPTN-DT) and carryback received date (TCB-DT):

Credit (overpayment) availability date depends on the loss year return received and due dates:

See IRM 21.5.9.5.11, Carryback Interest, 45-day Rule and Amended Returns and Claims (OBRA 1993).

Classify RINTS with CAT-A Examination criteria on the loss/gain year before allowing the claim. See IRM Exhibit 21.5.3-2, Examination Criteria (CAT-A) – General.

Forward all claims that meet CAT-A criteria to Examination, using local routing procedures before adjusting.

Accounts Management must retain control of these cases and monitor for timely return from Examination. See IRM 21.5.3.4.7 , Processing Claims and Amended Returns With Examination Involvement. CIS cases are suspended to CAT-A, and the IDRS control is then updated per CIS to Examination.

Fully or partially disallowed carryback claims require detailed explanations. See IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns, for specific requirements. The letter must include appeal rights and the right to file suit, and indicate the loss and gain year.

Use blocking series 00/15 for BMF and 91/92 for IMF partially disallowed claims. Send Letter 106C.

Use blocking series 98/99 for IMF and BMF fully disallowed claims. Send Letter 105C.

The statute of limitations on a carryback is determined by the loss year. See IRM 25.6.1.10.2.8.1, Net Operating Loss (NOL) Carryback or Capital Loss Carryback, and IRM 25.6.1.10.2.8.2, Business Credit Carryback.

RINTs, unlike TENTs, cannot be not processed prior to the loss year return posting to Master File. Therefore, the reassessment procedures used for TENTs ( See IRM 21.5.9.5.34), when the loss year return posts with different figures than the return copies provided by the taxpayer, or because the loss year return was not filed, do not apply to RINTS. See the paragraphs below for situations where the RINT may need to be addressed after processing.

If the IRS makes an error in processing a RINT, such as a TC 299 input for an incorrect amount (claim is for $500, but input is for $5,000), or the adjustment is made to an incorrect tax period, and a refund is issued, erroneous refund procedures must be followed. See IRM 21.4.5, Erroneous Refunds.

If the taxpayer files a corrected Form 1040X or Form 1120X, input TC 298 to assess tax previously allowed. Use the TC 299 INT-COMPTN-DT.

Use blocking series 95 to reassess statute imminent or expired years.

Taxpayers must carryback Foreign Tax Credit (FTC) on Form 1040X, 1120X, or other amended returns. Reject a Form 1045 or 1139 claiming a carryback of unused FTC.

FTC carryback/carryforward limitations are located in See Exhibit 21.5.9-1.

For 199808 and subsequent ending periods, the FTC carryback interest rules are identical to other carrybacks, IRC 6611(f).See IRM 21.5.9.5.11, Carryback Interest.

When a FTC carryback reduces an underpayment for a previous tax year, the carryback does not affect the computation of the interest on the underpayment for the period ending with the filing date for the tax year in which the foreign taxes were paid or accrued.

When a FTC carryback attributable to a NOL or NCL carryback from a subsequent year reduces an underpayment for an earlier tax year, the carryback does not affect the computation of the interest on the underpayment for the period ending with the filing date for the subsequent tax year in which the NOL or NCL carryback arose.

Computational instructions for carrybacks of FTC can be found in IRM 21.8.1.3.7, Carryback and Carryover - Foreign tax Credit (IMF), IRM 21.8.2.10.7, Carryback and Carryover - Foreign Tax Credit (BMF), and IRM 20.2.10.2.4, Carrybacks and Carryovers of Excess Foreign Taxes Paid.

This section provides procedures for working Form 6781, Gains and Losses from Section 1256 Contracts and Straddles. Taxpayers holding section 1256 contract(s) during the year may file this form. Contracts and straddles not included on Form 6781 are entered on Schedule D, Form 1040.

The Commissioner must approve claims based on revocation of a mixed straddle election. Approval must be attached.

For tax years 2001 and prior, a taxpayer could file only an amended return (1040X) for these losses. For tax years 2002 and later, a taxpayer can file either a tentative (Form 1045) or an amended return (Form 1040X).

Route to Examination for technical advice if:

An individual taxpayer can carryback section 1256 contract(s) losses 3 years, but can only apply them to section 1256 contract(s) gains. Assume there were no section 1256 contract(s) if the taxpayer does not carryback to the 2nd or 3rd preceding tax year.

TENTS and RINTS must have the following documents attached:

Verify that the taxpayer:

Input using the same rules as other TENT and RINT adjustments.

When Form 6781 is received in Accounts Management, and it is determined no adjustment is necessary, follow the instructions below.

This section provides instructions for processing carryback claims for RINTS and TENTS in combination with research credits.

Form 6765, Credit for Increasing Research Activities, is used to claim the credit for increasing the research activities of a trade or business.

For TY 2006 and subsequent, the credit can be claimed only as a general business credit and must be carried to Form 3800, General Business Credit. The allowable credit will then be figured on Form 3800. Any unused portion of this credit remaining, after the tax has been reduced to zero, can be carried back 1 year to reduce taxes for that year. It can then be carried forward 20 years.

For processing claims only involving the research credit, follow procedures outlined in IRM 21.7.4.4.8.3.4, Credit for Increasing Research Activities, F-6765. This IRM section contains the most comprehensive and up to date information on research credits.

For combination claims involving a carryback (RINT or TENT) and the research credit:

Special processing instructions were required when the credit expired June 30, 1999 but was reinstated retroactively for the period July 1, 1999 - June 30, 2004, by the Tax Relief Extension Act of 1999. This law created two suspension periods and allowed claims to be filed on Forms 1139, 1045, 1120X, and 1040X. The statute has expired for the vast majority of these claims, so the instructions have been removed from both IRM 21.7.4 and 21.5.9. However, if for some reason a statute is still open, the instructions in IRMs 21.7.4 and 21.5.9 can be found in prior revisions of the IRMs located in the SERP IRM Archives.

Taxpayers may file an amended return that creates (or modifies) a net operating loss and submit the carryback application/claim based on that amendment at the same time.

The amended loss year return and the TENT/RINT may be assigned to different CSRs/TEs.

In order to ensure consistent treatment and to help meet the Service's commitment to process TENTs/RINTs as quickly as possible, follow the procedures outlined in the following paragraphs when an amended loss year return is received in conjunction with the related carryback claim.

Taxpayers are required to include a copy of any amended return generating or modifying the net operating loss with the carryback application/claim (TENT/RINT). See IRM 21.5.9.4.2, Identifying Processable and Unprocessable Carryback Applications/Claims.

If the amended return is located on IDRS/CIS and has not been processed, the TENT/RINT and the loss year amended return should be worked by the same CSR/TE, if possible. If not possible, coordinate the processing of the amended loss year return and the carryback claim with the other CSR/TE.

Coordination with regard to the amended return must involve the following:

If the loss year amended return is processable and has not already been processed, ask the employee assigned the amended loss year return to input the adjustment so that the TENT/RINT application can be processed and closed within the 45-day interest-free period. See IRM 21.5.9.5.12 if the 45-day interest-free period is in jeopardy.

If the loss year amended return adjustment cannot be input for any reason, and the amended return cannot be reassigned to the carryback employee, follow the instructions in the table below. How the carryback is resolved is determined by whether it is a TENT or a RINT.