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Part 20. Penalty and Interest

Chapter 2. Interest

Section 9. Interest on Carryback of Net Operating Loss

20.2.9  Interest on Carryback of Net Operating Loss

20.2.9.1  (07-31-2001)
Carryback Overview

  1. A net operating loss (NOL), a capital loss (corporations only), and certain non-refundable unused tax credits can be carried back to the three tax years preceding the loss year and applied to taxable income or tax to reduce tax. For taxable years beginning after 8/5/97, NOL's are carried back 2 years. For taxable years beginning after 12/31/97, the General Business Credit is carried back 1 year.

  2. See Customer Service IRM 21.5 for complete instructions on identifying and processing carryback claims and requests for tentative refunds.

20.2.9.2  (07-31-2001)
Determining the Overpayment Interest Period

  1. For interest accruing after October 3, 1982:

    • compute interest from the later of the loss year return due date (determined without regard to extensions) or received date of a delinquent loss year return, or

    • the date the overpayment arose, whichever is later,

    • to the refund schedule date.

  2. For interest accruing before October 4, 1982:

    • compute interest from the first day after the end of the loss year or

    • the date the overpayment arose, whichever is later,

    • to the refund schedule date.

    Example:

    Loss year is 198112 (Form 1120)
    Loss year return due date is 03151982
    Tentative application or claim is filed 11141982

    1. If refunded within 45 days, interest is allowed from January 1, 1982 (one day after the end of the loss year) to either the received date of the claim or October 4, 1982, whichever is earlier. If not refunded within 45 days interest is allowed from January 1, 1982 to the refund schedule date. The interest start date for transaction code 299 is January 1, 1982 (pre-TEFRA).

    2. If refunded within 45 days, interest is allowed from September 1, 1982, to October 4, 1982. If not refunded within 45 days, interest is allowed from September 1, 1982 to October 4, 1982, then from November 15, 1982, to the refund schedule date (pre-TEFRA and post-TEFRA straddle years).

    Example:

    Loss year is 198208 (Form 1120)
    Loss year return due date is 11151982
    Tentative application or claim is filed 10151982

    Note:

    In both situations, the TC 295 or 299 carries an interest start date of September 1, 1982.

  3. Losses carried forward to years succeeding the loss year do not require restricted interest computations. Follow regular adjustment procedures for allowing normal credit interest.

  4. Compute interest on carryback applications and claims as follows:

    If And Then
    an application (Form 1045 or 1139) is filed The tax is not refunded within the 45-day period Compute interest from the due date of the loss year, received date of the delinquent loss year returnor the overpayment date, whichever is later.
    a claim (Form 1040X or 1120X) is filed The tax is not refunded within the 45-day period Compute interest from the due date of the loss year, received date of the delinquent loss year return or the overpayment date, whichever is later.

  5. The 45-day interest-free processing period begins with:

    1. the due date of the loss year return.

    2. received date of the delinquent loss year return.

    3. the date the loss year return is filed in processible form.

    4. the application or claim received date.

    5. the application or claim processible date, whichever is later.

    Note:

    For purposes of determining the 45-day interest-free processing period, the return for the loss year is treated as not filed before the claim for the overpayment is filed. When the 45-day period is in jeopardy, prepare a manual refund. See IRM 21.4.4. If the claim is processed within 45 days, interest is not allowed.

20.2.9.2.1  (07-31-2001)
Special Rules

  1. If a carryback application (Form(s) 1045 or 1139) and a carryback claim (Form(s) 1120X or 1040X) are filed for the same loss year, determine the start date for the 45-day interest free period as follows:

    If Then
    Form(s) 1139 or 1045 were filed prior to July 18, 1984 The 45-day interest-free period began upon receipt of the Form(s) 1120X or 1040X.
    Form(s) 1139 or 1045 are filed after July 18, 1984 The 45-day interest free period begins upon receipt of the Form(s) 1139 or 1045

    Reminder:

    This rule does not apply if the applications are received prior to the due date of the loss year return or the delinquent loss year return received date.

  2. For loss years ending before October 4, 1982, interest is paid from the first day after the loss year to October 4, 1982. Additional interest, if any, is computed from October 4, 1982, the loss year return due date or received date of the delinquent loss year return, whichever is later. See Exhibit 20.2.9 - 2., Summary Interest Computation Chart for Carryback Claims/Applications.

  3. If the account is restricted from Master File interest computation, the interest restriction mustbe addressed. See Exhibit 20.2.9 - 1.Interest Restrictions.

20.2.9.3  (07-31-2001)
Transaction Codes for Claims Processing

  1. Transaction codes 295 or 299 must contain:

    • An interest start date (INT-CMPTN-DT>), and

    • The tentative carryback application or claim received date (TCB-DT>).

  2. When the input date of the TC 295 or 299 is prior to the loss year return due date, use the current date as the interest start date. Master File uses the interest start date to determine the 45-day interest-free processing period. Credit interest is allowed on carryback claims not refunded within 45 days.

  3. For claims or applications received prior to the loss year return due date, the credit is available on the loss year return due date. In these situations:

    1. Change the tentative application or claim date (TCB-DT>) from the dale received to the loss year return due date.

    2. Override the IDRS check by inputting a "C in the override" (OVERRIDE-CD>) field.

    3. If the current date is prior to the return due date, change the interest start date (INT-CMPTN-DT) from the return due date to the current date. Do not enter a future date in the interest start date field.

    4. If refunded within 45 days of the RDD, no interest is allowed. If refunded after 45 days, interest is allowed from March 15, 2001. Transaction codes 295 or 299 TCB-DT> carry the March 15, 2001 date.

    Example:

    Loss year is 200012 (Form 1120)
    Return due date is 03152001
    Tentative application or claim is filed 02152001

  4. For claims or applications received after the loss year return due date (determined without regard to extensions) interest is allowed from the original due date of the loss year return. If the loss year return was filed late, interest is allowed from the received date of the delinquent loss year return.

    Example:

    Form 1120 for 200012 is filed November 22, 2001. At the same time it is filed, the taxpayer files Form 1139 for a tentative refund. If the refund is notprocessed within 45 days, credit interest begins on November 22, 2001, the date the delinquent return was filed.

    Note:

    The carryback credit is available for offset as of the due date of the return, if the credit consists of prepayment credits, i.e. withholding; estimated tax credits. However, allowable interest is computed from the delinquent loss year received date.

20.2.9.4  (07-31-2001)
Carryback Recaptures

  1. When recapturing erroneous carryback allowances and the interest is calculated manually:

    If Then
    Interest was not paid on the refund Interest is due from the refund schedule date (23C) on the amount of the carryback recapture equal to the amount refunded.
    If And Then
    Interest was paid on the refund the refund was issued before January 1, 1987 interest is due from the loss year return due date (without regard to extensions) for loss years 8210 and later or from the first day after the end of the loss year for 8209 and prior.
    Interest was paid on the refund The refund was issued after January 1, 1987 interest on the carryback and TC 772 annual netting interest amount begins on the refund schedule date (23C). See Rev. Proc. 94–60.

  2. When there is only one carryback involved, use TC 294/298 or TC 308 with an interest computation date (INT-CMPTN-DT>) to allow Master File to compute the interest. Input the interest with TC 340 if the module contains a prior restriction or the current adjustment requires restriction.

    Reminder:

    Use TC 340 with the debit interest amount when TC 295/299 was input with a date prior to the loss year return due date.

  3. When reassessing an erroneous carryback allowance and Master File computes the interest:

    If And Then
    Interest was paid on the refund The refund was issued after January 1, 1987 Enter the loss year return due date as the interest computation date for TC 294/298 or TC 308.
    If Then
    Interest was not paid on the refund Enter the loss year return due date as the interest computation date for TC 294/298 or TC 308.

  4. If an erroneous carryback allowance is recovered, debit interest accrues from the availability date of the carryback.

20.2.9.5  (07-31-2001)
Unused Investment Credit Carryback

  1. Compute credit interest as follows:

    • For interest accruing prior to October 4, 1982, allow interest from the first day of the year following the year in which the credit arose.

    • For interest accruing on or after October 3, 1982, allow interest from the due date or the delinquent received date of the year in which the credit arose.

  2. Assess a deficiency that is the result of an excessive or erroneous investment credit carryback any time before the statute expiration date of the taxable year that released the credit.

20.2.9.6  (07-31-2001)
NOL Carryback and Recaptured Investment Credit

  1. A taxpayer may claim investment credit in one year and pay recapture tax in another year. An NOL carryback could release an investment credit. Because the investment credit is no longer in use, the taxpayer does not owe the recapture tax. The recapture tax is then refunded with an availability date of the NOL that released the investment credit.

    Example:

    Hawthorn Corporation purchased an asset in 1991 and claimed a $300 investment credit. In 1993 they sold the asset. They were not entitled to any investment credit, so they paid the recapture tax of $300. In 1994, they had a net operating loss. It was carried back to 1991 and eliminated the income and the tax. The Form 1139 showed not only the carryback of the NOL to 1991, but also a refund of the recapture tax in 1993. A statement was attached explaining why the refund of the recapture tax was being claimed. Use a TC 295 with an interest date of March 15, 1995 to allow the refund of the recapture tax.

20.2.9.7  (07-31-2001)
Summary

  1. When determining the interest period for a tentative allowance or a general adjustment due to a carryback loss and there is a reduction of an unpaid liability:

    1. Use TC 295/299 or TC 309 with an interest computation date.

    2. Compute debit interest from the due date of the carryback year to the due date of the loss year return.

    3. Compute credit interest on any overpayment from the loss year return due, received date of delinquent loss year return or payment date whichever is later, to the refund schedule date.

  2. For a partial abatement of an unpaid tax liability:

    1. Use TC 295/299 or TC 309 with an interest computation date.

    2. Compute debit interest from the due date of the carryback year to the due date of the loss year return.

    3. Credit interest is not allowed on the abated unpaid tax liability.

  3. For a decrease in the liability which results in an overpayment:

    1. Refund or offset (if applicable) the overpayment.

    2. For interest accruing before October 4, 1982 compute credit interest from the first day after the end of the lost year or from the payment date, whichever is later, to the date the schedule is signed.

    3. For interest accruing on or after October 4, 1982, compute allowable interest from the loss year return due date, received date of the delinquent loss year return, or the payment date, whichever is later, to the date the schedule is signed.

  4. Credit any overpayment and any corresponding credit interest to any unpaid tax, interest, and penalty for any other year before refunding any part of the overpayment. Interest is computed on the overpayment from its availability date to the due date of the liability that is being paid.

    If Then
    The overpayment is credited to a tax liability for a prior year Interest is not allowed if the overpayment is less than or equal to the tax liability.
    The overpayment is credited to a tax liability due for a subsequent year Interest is allowed from the date the credit became available to the due date of the subsequent year tax liability if the overpayment is less than or equal to the tax liability.
    The overpayment is credited to unpaid interest, penalty or addition to tax for another year or type of tax Interest is allowed from the credit availability date to the due date of the interest, penalty, or addition to tax.

  5. Compute interest on any remaining overpayment to be refunded, from the credit availability date to the refund schedule date, after all liabilities for tax, penalties, additions to tax, and interest have been paid.

  6. If credit interest was allowed, assess interest on an excessive tentative refund or an erroneous claim refund from the date it was allowed. If credit interest was allowed, assess interest on the excessive refund and the netted interest amount from the refund date to:

    • the 30th day after filing a waiver, or

    • the date of assessment, or

    • the date of payment, or

    • a credit availability date (if paid by credit),

    • whichever is earlier.

  7. When determining the debit interest period for an NOL and net capital loss carryback with general adjustments, assess interest on a net deficiency as shown in Chapter 8

  8. Allow interest on a net overassessment as shown in Chapter 4.

  9. When deficiency interest was assessed at any time before the end of loss year and there is a net overassessment due to a combination of general adjustment decrease and a carryback allowance, deficiency interest must be reduced.

    1. Determine whether the deficiency interest was initially computed to a date beyond the loss year due date. If so, recompute the interest to the loss year due date.

    2. Abate the excess interest with a TC 341.

  10. Penalties for late filing, negligence in reporting income, and fraud are not reduced by carryback losses. See lRM 20.1 Penalties.

Exhibit 20.2.9-1  (07-31-2001)
Interest Restrictions

INTEREST RESTRICTIONS(REMINDER)
CAUTION
Be sure to check for interest restrictions, (TC 34X) which may require a manual recomputation and assessment of interest. If the effective date of a carryback is later than the previous TC 340 assessment date, you must compute and assess any additional interest. Input your TC 340 with your TC 295/299. If the effective date of the carryback is earlier than the TC 340 assessment date, recompute the interest inputting a TC 341 for any interest reduction required. If there is no change in interest, input TC 340 for zero with TC 295/299 to avoid an unpostable condition. Restrictive debit interest transactions (TC 34X) do not restrict the computer from computing allowable interest. If Failure to Pay penalty is restricted, recompute that penalty. Use TC 270 to assess or TC 271 to abate the Failure to Pay penalty as required.

When an account is re-established from the retention register, interest is restricted with a TC 340 for zero.

Exhibit 20.2.9-2  (07-31-2001)
Summary Interest Computation Chart for Carryback Claims/Applications

SUMMARY INTEREST COMPUTATION CHART FOR CARRYBACK CLAIMS/APPLICATIONS
TAX PERIOD ENDED 198209 & PRIOR TAX PERIOD ENDED AFTER 198209
CLAIMS/APPLICATIONS PROCESSED WITHIN 45 DAYS CLAIMS/APPLICATIONS PROCESSED WITHIN 45 DAYS
INTEREST COMPUTATION DATES

1 DAY AFTER LOSS YEAR
-TO- the earlier of or the received date of the claim/application
10/4/1982

T/C770 - MONEY AMOUNT 		NO INTEREST ALLOWABLE
CLAIMS/APPLICATIONS PROCESSED AFTER 45 DAYS CLAIMS/APPLICATIONS PROCESSED AFTER 45 DAYS
INTEREST COMPUTATION DATES

1 DAY AFTER LOSS YEAR
-TO-
10/4/1982

PLUS

ORIGINAL DUE DATE OF LOSS YEAR-TO-INTEREST TO DATET/C 770 - MONEY AMOUNT 		INTEREST COMPUTATION DATESORIGINAL DUE DATE OF LOSS YEAR-TO-INTEREST TO DATE

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