Practitioners beware - use of Form 1045 or 1139 may create unexpected liability.Tax practitioners considering refund TO REFUND. To pay back by the party who has received it, to the party who has paid it, money which ought not to have been paid. 2. On a deficiency of assets, executors and administrators cum testamento annexo, are entitled to have refunded to them legacies requests based on the carryback carryback n. in taxation accounting, using a current tax year's deductions, business losses or credits to refigure and amend a previously filed tax return to reduce the tax liability. (See: carryover) of losses or credits must be aware of the potential different results generated by the filing of an application for a tentative tentative, adj not final or definite, such as an experimental or clinical finding that has not been validated. carryback adjustment (tentative) filed on a Form 1045, Application for Tentative Refund (for individuals), or Form 1139, Corporation Application for Tentative Refund (for corporations), versus the filing of an actual claim for refund (claim) on a Form 1040X, Amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return. One of the most significant differences involves the IRS's ability to charge interest on subsequently determined deficiencies. While most taxpayers will not be concerned about potential deficiency A shortage or insufficiency. The amount by which federal Income Tax due exceeds the amount reported by the taxpayer on his or her return; also, the amount owed by a taxpayer who has not filed a return. interest issues, for certain taxpayers the potential negative ramifications ramifications npl → Auswirkungen pl of filing a tentative may be highly significant. Background In general, the tentative is limited to specific items listed in Sec. 6411. These items include net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. (NOL NOL - Never Offline ) carrybacks, capital loss carrybacks Loss Carryback An accounting technique with which a company retroactively applies net operating losses to a preceding year's income in order to reduce tax liabilities present in that previous year. and business credit carrybacks. A carryback of foreign tax credits (FTCs) is not specifically mentioned in Sec. 6411 and must be carried back on a Form 1040X or 1120X. One critical difference in the filing of a tentative versus a claim is the fact that a tentative is a pre-audit refund while a claim generally results in a post-audit Post-audit A set of procedures for evaluating a capital budgeting decision after the fact. refund. The taxpayer in need of cash will most often focus on this fact when considering which form and associated procedures to use. The table on page 764 provides a comparison of differences between die filing of a tentative versus a claim. Additional Issue Both tentative and claim carrybacks extend the period of assessment for the carryback year. One distinction related to this extension, which has not been focused on by many practitioners, must be addressed. If a Form 1045 or 1139 is filed, the statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought. Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law. (SOL) for assessment of tax for the year to which the carryback is taken (i.e., the carryback year) is actually extended for an amount equal to the refund. This includes amounts related to the carryback and items unrelated to the carryback, as long as die deficiency does not exceed die refund importantly, interest is not subject to this limitation and may result in the Service assessing an amount in excess of the refund. If a Form 1040X or 1120X is filed, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. may assess a deficiency attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to the carryback, but not one attributable to items unrelated to the carryback, within the extended period. However, because the Forms 1040X and 1120X result in a pre-refund review, the Service may offset an unassessed, barred deficiency (including barred interest) in the carryback year against the requested refund. Example 1: Calendar-year corporation C has an NOL carryback from 1993 to 1990. The SOL for assessment on the 1990 year is closed, except for carryback items. The carryback reduced tax by $1,000,000. Upon examination, it was determined that the carryback from 1993 was correct; however, an additional tax adjustment was discovered in the 1990 year. The tax adjustment is $950,000. Absent SOL considerations, deficiency interest of $262,892 would be due on the $950,000 tax increase for the period from 3/15/91 (the due date of the 1990 return) to 3/15/94 (the due date of the 1993 return), plus additional interest until the actual payment. Scenario A: C files a tentative carryback claim on Form 1139. C will receive the $1,000,000 refund prior to examination of the Form 1139 by the IRS. As a result of the post-refund audit, C will be assessed tax of $950,000 plus deficiency interest of $262,892 for the period 3/15/91 to 3/15/94. In addition, C will be assessed deficiency interest on the $262,892 from 3/15/94 to the date of payment for both the $950,000 plus the appropriate deficiency interest. Scenario B: C files the NOL carryback on Form 1120X. Although the SOL for assessment is closed on the 1990 tax year, as a result of the pre-refund audit, the $1,000,000 refund created by the NOL carryback will be offset by the barred deficiency ($950,000 + $50,000 of the deficiency interest). C will receive no refund; however, no additional tax or deficiency interest may be assessed. Example 2: Calendar-year corporation C has an NOL carryback from 1993 to 1990. The SOL for assessment on the 1990 year is closed, except for carryback items. The carryback reduced tax by $1,000,000. Upon examination, it was determined that the carryback from 1993 was correct; however, an additional tax adjustment was discovered in the 1990 year. The tax adjustment is $2,000,000. Absent SOL considerations, deficiency interest of $553,457 is due on the $2,000,000 tax increase for the period from 3/15/91 (the due date of the 1990 return) to 3/15/94 (the due date of the 1993 return), plus additional interest until the actual payment. Scenario A: C files a tentative carryback claim on Form 1139. C will receive the $1,000,000 refund prior to examination of the Form 1139 by the Service. As a result of the post-refund audit, C will be assessed tax of $1,000,000 plus deficiency interest of $276,728 for the period 3/15/91 to 3/15/94. In addition, C will be assessed deficiency interest on the $276,728 from 3/15/94 to the date of payment for both the $1,000,000 plus the appropriate deficiency interest. Note that the IRS can assess tax only up to the amount of the $1,000,000 refund rather than the $2,000,000 potential tax deficiency. Deficiency interest may then be assessed on the $1,000,000 tax deficiency. Scenario B: C files the NOL carryback on Form 1120X. Although the SOL for assessment is closed on the 1990 tax year, as a result of the pre-refund audit, the $1,000,000 refund created by the NOL carryback will be offset by a portion of the barred underpayment equal to the amount of potential refund created by the carryback. C will receive no refund; however, no additional tax or deficiency interest may be assessed. Conclusion Although a client filing a carryback may need the refund as quickly as possible, a practitioner practitioner /prac·ti·tion·er/ (prak-tish´un-er) one who has met the requirements of and is engaged in the practice of medicine, dentistry, or nursing. nurse practitioner see under nurse. must be sure to advise the client of the significant distinctions between the filing of the request for tentative allowance on Forms 1045 and 1139 versus the claims for refund on Forms 1040X and 1120X. The potential exposure for additional deficiency interest is particularly significant if a 10-year carryback is involved. This could truly be a trap for the unwary. Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : Mr. Pascarella chairs the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Tax Division Tax Practice Management Committee. Mr. Bobrow is a member of the committee. |
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