The Net Operating Loss Carry Back is a tax relief option that allows a taxpayer to reduce an existing tax liability by applying net operating losses for the current fiscal year against gains from previous years. In light of the recent economic downturn, is not uncommon for allowable deductions in any given year to exceed gross income, thus resulting in an operating loss. By the same token, it is a fairly common occurrence in the current economic environment for a taxpayer to have paid taxes on substantial net income in past years and yet have incurred financial losses for the current year. This is the set of financial circumstances for which the Net Operating Loss Carry Back provision was designed.
The Net Operating Loss Carry Back is dissimilar to several of the other tax settlement options offered by the IRS in that it is a tax relief alternative that is available to any taxpayer, regardless of their financial situation. Unlike the Offer in Compromise and the Partial Payment Installment Agreement, there are no specific qualifying criteria. Because of this difference, it is always advantageous to use the Net Operating Loss Carry Back option whenever the financial circumstances are such that there has been a financial loss in any given year following gains in previous years. In recognition of the current economic climate, the IRS has made the use of this carry back option even more attractive by instituting steps to accelerate the payment of any refunds generated by offsetting a prior year’s tax liability. For certain specific situations, the IRS has also extended the time period over which that loss can be offset.
Of course the use of Net Operating Loss Carry Back is subject to the same scrutiny as that of a regularly filed tax return. When this offset is requested, IRS will look carefully at the current year’s tax return together with returns that were filed during the carry back period. Great care should be exercised to make sure all of these returns have been filed correctly and any necessary amendments to previous returns have been submitted according to established IRS guidelines. As with any of the tax settlement options, enlisting the help of a qualified tax specialist to assist in this process might very well prove to be a worthwhile investment. Although the IRS has made changes to the Net Operating Loss Carry Back option in order better accommodate the needs of taxpayers in the current economic climate, it nevertheless has not compromised its existing requirements for thoroughness and accuracy.
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