Net Operating Loss (NOL) carry-forward requires careful record-keeping

Taxpayers who claim a net operating loss (NOL) on a tax return must keep careful records to substantiate the claim, including past tax returns that show consistent treatment of NOLs and financial data (or strong corroborating testimony and recreated records), or risk being denied the NOLs during an audit.

In Martin vs.Commissioner of Internal Revenue, the Tax Court set forth the standard of proof the taxpayer must show to claim the NOLs, including that the taxpayer bears the burden of substantiating its NOLs by establishing their existence as well as the amount that may be carried over to the years at issue (varies by state).

In practice, this means that if you claim a NOL in 2002, and carry that loss forward for 20 years, the 2002 return (and every return going forward until 2022) is relevant as evidence of the NOL.  This applies even though the statute of limitations on older returns may have expired.  In fact, Section 7602(a) states “the Secretary is authorized -(1) To examine any books, papers, records, or other data which may be relevant or material for the purpose of ascertaining the correctness of any return.”  Keep this in mind if changing accountants, as possession of old tax receipts and paperwork can sometimes be misplaced in the transfer.

If you’d like more detailed information about claiming NOLs on future tax returns, contact your ShindelRock tax professional.