Audit statute for net operating losses
Did you know that audits of net operating losses (NOLs) and other carryforwards can extend beyond the usual statute of limitations?
Certain amounts generated in prior years and carried over to the current year’s return can impact taxable income calculations. Because these carryovers can span beyond the typical three-year statute of limitations, using an NOL deduction can result in closed-year amounts affecting taxable income in open years.
Under Sec. 7602(a), the IRS is authorized to examine any relevant data to verify tax returns, including NOL amounts from closed years under the statute of limitations.
This presents two risks for taxpayers. Firstly, if taxpayers rely solely on the three-year statute of limitations, they might dispose of records supporting NOLs prematurely. Secondly, assuming a closed statute-of-limitation period means IRS acceptance of prior returns could lead to disregarding the need for underlying records proving NOL deductions.
To mitigate these risks, taxpayers should retain records supporting loss carryforwards until the NOL is fully utilized and the return, including the final NOL deduction, expires under the applicable statute of limitations.
For more information on this topic, contact a ShindelRock tax professional.