Taxpayers may soon be able to fax requests for quick refund claims for alternative minimum tax credits and net operating loss deductions that previously could only be filed via hard copy through mail delivery services.
According to an April 13 FAQ, the IRS will accept faxes of quick refund claims that stem from two provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136): AMT credits and NOLs.
Only claims that are filed on Form 1139, “Corporation Application for Tentative Refund,” or Form 1045, “Application for Tentative Refund,” for individuals, trusts, and estates, qualify for digital transmission beginning April 17, when the fax numbers will be operational.
The temporary fax procedures are meant to deliver CARES Act-related NOL carryback refunds as quickly as possible, Sunita Lough, IRS deputy commissioner for services and enforcement, said during an Urban-Brookings Tax Policy Center webinar held the same day.
Lough noted that all service centers are closed. Further, “there is so much [IRS] mail that the post office can’t hold it,” she said. “We are literally holding it in trailers until our employees can get back and work through them.”
Forms 1139 and 1045 are normally delivered through the U.S. Postal Service or by a private delivery service, and the IRS generally must process those refund claims within 90 days.
“With broad interest by affected taxpayers in pursuing carryback claims, the speed of facsimile transmission is welcome news,” which should reassure taxpayers and practitioners that claims are being received and processed, Todd Simmens of BDO USA LLP told Tax Notes.
Shamik Trivedi of Grant Thornton LLP also commended the IRS’s “innovative, MacGyver-like way . . . to process these claims through fax, which a lot of taxpayers are desperately relying on as a way to increase their liquidity in the short term.”
“As simple as a fax sounds to the general public, this required a lot of deep thinking at IRS from both a legal and technology standpoint,” Trivedi said.
Nathan Smith of the CBIZ National Tax Office said that with the temporary procedures, the IRS can satisfy “the requirement under section 6411(b) to process NOL carryback claims within 90 days, which keeps this outlet open to our clients who need cash as quickly as possible.”
The CARES Act modified section 172 to address liquidity issues arising from the COVID-19 pandemic by temporarily repealing the 80 percent NOL limitation and allowing deductions for loss carryovers and carrybacks to fully offset taxable income for tax years beginning before January 1, 2021.
The new law also allows companies to carry back losses arising in tax years from 2018 to 2020 for up to five years before the year of the loss.
With the Tax Cuts and Jobs Act’s repeal of the corporate AMT, Congress allowed companies to offset their regular tax liability by the amount of the AMT credit. Under section 53(e), credits remaining at the end of tax years from 2018 to 2020 are refundable in an amount equal to 50 percent of the excess of the minimum tax credits over the regular tax liability for the tax year. Remaining amounts of AMT credits are fully refundable for tax years beginning in 2021.
The CARES Act accelerated the recovery of the AMT credits by allowing companies to claim a refund on the remaining credits in 2018 or 2019.
Broader Applicability
Simmens said the IRS “has provided much-needed quick and efficient CARES Act NOL carryback procedures,” but he suggested it consider accepting other forms for fax transmission to ensure faster refund processing.
The IRS emphasized in FAQ No. 6 that the fax procedures aren’t available for filing Form 4466, “Corporation Application for Quick Refund of Overpayment of Estimated Tax.”
Under section 6425, corporations that overpaid their 2019 estimated taxes can apply for a quick refund if the adjustment amount is at least 10 percent of the estimated income tax liability.
“While we understand Forms 4466 can present identity theft concerns, if facsimile filing is temporarily accepted, it would at least start the process more quickly,” Simmens said.
Simmens also noted that questions continue to be raised about carryback claims submitted on amended returns, and whether a similar submission option might be available in the future.
A special intake for amended returns that have CARES Act carrybacks might enable more targeted attention for processing refunds that otherwise may not get priority treatment, Simmens said.
Those forms include Form 1120X, “Amended U.S. Corporation Income Tax Return,” and Form 1040-X, “Amended U.S. Individual Income Tax Return.”
Transition Tax Relief
Also included in the FAQ is the answer to a question related to transition tax filers seeking to use NOL carrybacks.
According to FAQ No. 5, taxpayers may ignore instructions for forms 1139 and 1045 and use those forms to apply for refunds in a section 965 year.
The FAQ "reflects that the IRS is doing everything they can to facilitate the policy goals of the CARES Act, which is to facilitate refunds, to facilitate liquidity,” Raymond Stahl of EY told Tax Notes. “It’s incredible that they have gotten so much [guidance] out under the circumstances.”
Stahl had previously flagged the unavailability of quick refunds as a problem for taxpayers looking to take advantage of the NOL carrybacks in transition tax years.
The FAQ states that the forms' instructions will be updated. Also, it says the IRS intends to issue additional instructions on tentative refund filing requests for taxpayers with section 965(h) installment payment liabilities “so that these requests and liabilities can be identified, routed, and tracked appropriately,” and to avoid accidental acceleration of those deferred installment payments, refund delays, “or other processing complications.”
Under section 965(h), taxpayers may elect to pay their transition tax liability in eight annual installments: 8 percent of the liability for the first five installments, 15 percent for the sixth installment, 20 percent for the seventh, and 25 percent for the eighth.
Despite the new FAQ, Stahl said the larger issue blocking most transition tax taxpayers from receiving refunds remains unaddressed. Under FAQ No. 14 of the transition tax FAQ, a taxpayer may not receive a refund of any portion of a 2017 tax payment unless the amount exceeds all amounts to be paid under section 965(h).
“That is the essential impediment. Depending on the size of [taxpayers’] NOLs, some people will be able now to use the Form 1139 or 1045 to claim a refund in their transition tax year, but I would expect that many people would still not be able to claim a refund with respect to that year because FAQ 14 is unchanged,” Stahl said.
An earlier draft provision in coronavirus legislation that didn't end up in the final bill would have amended section 965(h) to clearly allow for refunds on overpayments of the transition tax for taxpayers that elected to pay the tax in installments.
Unrelated to the new FAQ, Stahl said taxpayers could still seek refunds by electing to skip the transition tax years.
Next Steps
Taxpayers should wait until the fax numbers are operational rather than mail their forms because mail processing has been slowed by the pandemic, according to the IRS.
Trivedi advised filers to “proceed with these submissions as they normally would for a paper filing, which would include ensuring the forms are correct and complete, signed and substantiated, and that proof of successful fax transmittal is retained.”
“At some point in the future, it would be nice to have IRS confirm that the successful transmittal printout or some other record is sufficient evidence of proof of timely filing under section 7502,” Trivedi said.
Once the faxed form for NOL carrybacks is received, “we would hope for quick processing,” Simmens said. But if the taxpayer's submission requires follow-up by IRS staff, a more direct method of contact with taxpayers or their representatives would be preferred, he said.
“While telephone contact is not always IRS protocol, it would be a welcomed step rather than sending taxpayers questions through the mail,” Simmens said, adding that that might help avoid processing delays.
William Hoffman contributed to this article.