‘Quick’ carryback tax refunds took nearly double the 90-day deadline

By Paul Bonner

Over a period of 15 months, the IRS consistently missed its 90-day deadline to process taxpayers' applications for carryback adjustment refunds under COVID-19 relief legislation, the U.S. Government Accountability Office (GAO) said in a report. Despite a statutory requirement to pay such refunds within 90 days, the average time reached 165 days, the GAO said.

The report, titled COVID-19: Significant Improvements Are Needed for Overseeing Relief Funds and Leading Responses to Public Health Emergencies (GAO-22-105291), was released Jan. 27 and assessed responses to the pandemic by several federal agencies, including in areas of public health and direct relief, such as rental and nutrition assistance.

One section, "Tax Relief for Businesses," analyzed the IRS's performance in processing the applications, by which businesses and individuals took advantage of loss and credit carryback provisions such as the five-year carryback of net operating losses (NOLs) allowed for losses arising in tax years 2018, 2019, and 2020 under Sec. 172(b)(1)(D), enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and corporate alternative minimum tax credit refunds resulting in some cases from a CARES NOL carryback.

As a result of the CARES Act provisions, the IRS received 276% more applications for carryback refunds in fiscal 2021 over fiscal 2020, the GAO reported. About 80% of the applications were intended to provide "quick" tentative refunds, using Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund. But on the whole, they were anything but quick.

The IRS implemented temporary procedures to allow taxpayers to submit Forms 1139 and 1045 by fax between April 17, 2020, and the end of the year, while mail processing centers were closed because of the pandemic. Otherwise, the forms must be filed on paper.

The refunds are required to be issued within 90 days from the date on which the IRS receives a complete application for a tentative carryback refund adjustment, or 90 days from the last day of the month in which the return is due, whichever is later (Sec. 6411(b)).

The IRS began missing the 90-day mark in September 2020, and processing times continued lengthening through 2021. As of November 2021, the average time was 165 days, the GAO said, 1.8 times the 90-day deadline.

Moreover, the Service did not have plans or controls to detect or address the problem until April 2021, the GAO said.

In the three years before late 2020, the IRS had consistently met the 90-day deadline, the GAO noted. The processing time peaked in March and June 2021 and declined until November, when it began to rise again. In June 2021, the IRS started training additional staff to process the carryback refunds.

Besides the hardship imposed on business taxpayers as they go without a sought refund, tardiness has consequences for the government, as well. The GAO found that interest on the carryback refunds owed, which generally is triggered at 45 days after a processable claim is filed (see Secs. 6611(e) and (f)), amounted to $61 million for fiscal 2021.

In fact, the IRS remains at risk of continuing to exceed the 90-day requirement, the GAO said. The GAO recommended the IRS establish a plan to detect and mitigate lateness in issuing the refunds.

The IRS neither agreed nor disagreed with the recommendation but said it would take it into consideration as it continues to improve taxpayer services. The IRS also said it would not have been able to prevent processing times from exceeding the statutory maximum even if it had had threshold indicators in place, because of the impact on its operations by the pandemic, which included limited staffing due to evacuation orders, and the high volume of applications.

In its technical response, the IRS said it does have several inventory management tools for processing applications for tentative refunds, which allow it to sort applications by priority, received date, and case type, among other criteria.

"Applications for tentative refunds are considered priority work," and the IRS "makes every effort" to process them within the 45- and 90-day time frames, said the comments, enclosed with a letter from Thomas Brandt, IRS chief risk officer.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com

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