TIGTA Report 2022-36-048 — IRS Inability to Timely Process Noncorporate CARES Act Net Operating Loss Refund Applications

Record facts

Summary

A final audit report of the Treasury Inspector General for Tax Administration, Report Number 2022-36-048, issued September 7, 2022, on the Internal Revenue Service’s processing of noncorporate applications for refund of net operating losses under the CARES Act. The audit examines Forms 1045, Application for Tentative Refund, filed under Sections 2303 and 2304 of the CARES Act. The report finds that processing delays cost the Federal Government at least $42 million in accumulated interest for Fiscal Years 2020 and 2021, that Forms 1045 not processed within the statutory 90 days rose from 900 in Fiscal Year 2020 to 7,585 in Fiscal Year 2021, and that ending inventory rose from 1,626 to 8,974. It makes four recommendations, three of which IRS management agreed with. The report includes appendices with the objective and methodology and management’s response.

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1 
 
 
 
 
 
 
The IRS’s Inability to Timely Process Noncorporate 
Applications for Refund of Net Operating Losses Under 
the CARES Act Delayed Taxpayer Refunds and Cost 
Millions of Dollars in Additional Interest 
 
 
September 7, 2022 
 
Report Number:  2022-36-048 
 
 
 
 
 
 
 
TIGTACommunications@tigta.treas.gov   |   www.treasury.gov/tigta 
 
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

HIGHLIGHTS:  The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating 
Losses Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Final Audit Report issued on September 7, 2022 
Report Number 2022-36-048 
 
 
Why TIGTA Did This Audit 
This audit was initiated to assess 
the IRS’s efforts to ensure 
individual taxpayers’ compliance 
with the net operating loss (NOL) 
provisions associated with the 
Coronavirus Aid, Relief, and 
Economic Security (CARES) Act and 
Form 1045, Application for 
Tentative Refund.    
Impact on Tax Administration 
The CARES Act was passed to 
financially assist individual and 
business taxpayers through the 
pandemic.  Sections 2303 and 
2304 of the CARES Act, signed into 
law on March 27, 2020, made 
several modifications that 
temporarily repealed certain 
restrictions imposed by the Tax 
Cuts and Jobs Act.  Although the 
temporary repeal provided an 
opportunity for taxpayers to carry 
back losses, which were previously 
limited, challenges in processing a 
substantial increase in applications 
for refund associated with these 
carrybacks has cost the Federal 
Government at least $42 million in 
accumulated interest for Fiscal 
Years 2020 and 2021.   
 
 
 
 
 
 
 
 
 
 
What TIGTA Found 
In spite of initial actions to promote more efficient processing of 
applications for tentative refunds, including the ability to e-fax these 
applications, the IRS was unable to timely process the large volume 
of applications and accumulated a large backlog.  The IRS is 
statutorily required to process tentative refund applications within 
90 days.  However, the number of Forms 1045 considered over-aged 
(i.e., not processed within 90 days) increased from 900 in Fiscal 
Year 2020 to 7,585 in Fiscal Year 2021.  The cases remaining in 
ending inventory (i.e., not processed by the end of the fiscal year) 
went from 1,626 in Fiscal Year 2020 to 8,974 in Fiscal Year 2021.  The 
overall impact has been negative for both taxpayers, whose potential 
refunds have been delayed, as well as the Federal Government, which 
must pay the accumulated interest due to taxpayers on these delayed 
refunds. 
IRS officials stated that CARES Act changes presented a different 
compliance risk because they were generally more favorable to the 
taxpayer.  As such, they believed compliance risk was not as high as 
in other areas and made no effort to update examination plans to 
ensure that taxpayers complied with the provisions of the CARES Act. 
Finally, the IRS did not change the criteria it used to identify 
potentially noncompliant cases during NOL processing that would 
require further scrutiny by the IRS’s Examination functions despite 
the large volume of cases and, at times, significant losses being 
carried back under the CARES Act. 
What TIGTA Recommended 
TIGTA made four recommendations to the Commissioner, Small 
Business/Self-Employed Division, and the Commissioner, Wage and 
Investment Division, that included: 1) devoting additional resources 
to process applications for tentative refunds faster to reduce the 
accumulation of interest; 2) completing the evaluation of filing 
tentative refunds by e-fax; 3) developing contingency plans, specific 
to the processing of Forms 1045, so that taxpayers are not adversely 
affected by a future cessation of operations; and 4) evaluating 
compliance strategies to determine if they match the risks presented 
by the CARES Act. 
IRS management agreed with three recommendations and disagreed 
with the fourth, stating that they had evaluated the risks associated 
with changes to the NOL deduction provisions and completed 
training, publication of materials, and Internal Revenue Manual 
updates.  However, the statute of limitations for tax returns involving 
CARES Act NOL provisions will not expire until Calendar Year 2024 at 
the earliest.  Therefore, TIGTA maintains that it would be prudent for 
the IRS to consider the risks associated with CARES Act NOL 
provisions for the Tax Years 2018 through 2020 returns it will be 
examining in the coming years. 
 
 

U.S. DEPARTMENT OF THE TREASURY 
WASHINGTON, D.C.  20024 
TREASURY INSPECTOR GENERAL 
FOR TAX ADMINISTRATION 
 
 
 
September 7, 2022 
 
 
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE 
 
 
 
FROM: 
Heather M. Hill 
 
Deputy Inspector General for Audit 
 
SUBJECT: 
Final Audit Report – The IRS’s Inability to Timely Process Noncorporate 
Applications for Refund of Net Operating Losses Under the CARES Act 
Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional 
Interest (Audit # 202130622) 
 
This report presents the results of our review to assess the Internal Revenue Service’s efforts to 
promote noncorporate business taxpayer compliance with tentative refund applications and 
claims under Section 2303 and 2304 Net Operating Loss provisions of the Coronavirus Aid, 
Relief, and Economic Security Act.1  This review is part of our Fiscal Year 2022 Annual Audit Plan 
and addresses the major management and performance challenge of Responding to the  
COVID-19 Pandemic. 
Management’s complete response to the draft report is included as Appendix II.   
Copies of this report are also being sent to the Internal Revenue Service managers affected by 
the report recommendations.  If you have any questions, please contact me or Matthew A. Weir, 
Assistant Inspector General for Audit (Compliance and Enforcement Operations). 
 
 
 
                                                 
1 Pub. L. No. 116-136, 134 Stat. 281 (codified as amended in scattered sections of 2, 5, 12, 15, 20, 21, 29, 42, and 
45 U.S.C.). 

 
 
The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Table of Contents 
Background .....................................................................................................................................Page 1 
Results of Review .......................................................................................................................Page 5 
A Significant Number of Tentative Refund Applications 
Submitted Under the CARES Act Remain in Inventory ..........................................Page 5 
Recommendations 1 through 3: ..............................................Page 8 
Risk Criteria and Examination Plans Were Not Changed 
With the Significant Change in Tax Law ......................................................................Page 8 
Recommendation 4: ...................................................................Page 10 
Procedures Did Not Ensure That Examinations of Individual 
Taxpayers Consider Losses Filed by Taxpayers Under the CARES Act .............Page 11 
Appendices 
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 12 
Appendix II – Management’s Response to the Draft Report ...............................Page. 14 
Appendix III – Abbreviations ............................................................................................Page. 18 
 
 
 

 
Page  1 
The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Background 
Fluctuations in income and expenses can cause a taxpayer to have substantial profits in one tax 
year and losses in another.  A Net Operating Loss (NOL) might occur when a taxpayer’s 
allowable deductions exceeds its gross income for a tax year, resulting in negative income.  A 
taxpayer with an NOL potentially does not owe any income taxes for the tax year generating the 
loss and, prior to the passage of the Tax Cuts and Jobs Act (TCJA), may have been able to carry 
back the loss to offset income reported in earlier tax years, which could result in a refund of 
taxes already paid.1  Any loss remaining after applying the NOL to preceding tax years may be 
carried forward and applied to taxable income in future tax years.  However, for NOLs arising in 
tax years beginning after 2017, the TCJA generally removed the option for most entities to carry 
back an NOL and limited the amount of an NOL that could be carried forward to 80 percent of 
taxable income.     
Due to the Coronavirus Disease 2019 pandemic, the Coronavirus Aid, Relief, and Economic 
Security (CARES) Act of 2020 included tax measures to provide assistance to individual 
taxpayers.2  Section 2303 of the CARES Act amended Internal Revenue Code (I.R.C.) § 172 
concerning NOLs, and § 2304 of the CARES Act amended I.R.C. § 461(l) concerning Excess 
Business Losses (EBL).  Figure 1 shows a summary of the legislative changes for NOLs and EBLs.   
Figure 1:  Legislative Changes for NOLs and EBLs 
 
NOLs 
EBLs 
TCJA Section 
13302 
11012 
CARES Act Section 
2303 
2304 
Major Changes 
Carrying Time and Limiting to 
Percentage of Taxable Income 
Establish and  
Implement EBL 
Taxpayers Impacted 
All 
Individuals 
Required to Amend 
Optional3 
Mandatory 
Method(s) to Amend 
Form 1040-X or Form 1045 
Form 1040-X 
Source:  Treasury Inspector General for Tax Administration (TIGTA) analysis of the TCJA and the CARES 
Act.  Form 1040-X, Amended U.S. Individual Income Tax Return.  Form 1045, Application for Tentative 
Refund.  
                                                 
1 Pub. L. No. 115-97, 131 Stat. 2054 (2017).  Officially known as “An act to provide for reconciliation pursuant to 
titles II and V of the concurrent resolution on the budget for Fiscal Year 2018.” 
2 Pub. L. No. 116-136, 134 Stat. 281 (codified as amended in scattered sections of 2, 5, 12, 15, 20, 21, 29, 42, and 
45 U.S.C.). 
3 A taxpayer could elect to forgo the carryback; however, the time frame associated with making this election has 
passed. 

 
The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Net Operating Losses 
As shown in Figure 2, both the TCJA and the CARES Act changed the tax law regarding the use 
of NOLs.  The changes involved altering the rules regarding carrybacks and carryforwards and 
limiting NOLs to a certain percentage of taxable income.4   
Figure 2:  NOL Carryback and Carryforward Rules Due to the CARES Act 
 
 
 
Limitation on NOL Utilization  
in Carryforward Period 
 
Carryback 
Period 
Carryforward 
Period 
Tax Years Before 
TY 2018 
TYs 2018 - 
2020 
Tax Years  
After TY 2020 
Pre-2018 NOLs 
2 years 
20 years 
Not limited 
Not limited 
Not limited 
TYs 2018 - 
NOLs 
2020 
5 years 
Indefinite 
N/A 
Not limited 
80% limitation 
Post-2020 NOLs 
(TCJA) 
N/A (no 
carryback) 
Indefinite 
N/A 
N/A 
80% limitation 
Source:  TIGTA analysis of the TCJA and the CARES Act. 
The TCJA represented the most significant tax code overhaul in more than three decades.  
Section 13302 of the TCJA repealed the carryback periods for NOLs incurred in tax years ending 
after December 31, 2017, while allowing for the carryback of certain NOLs.  
Specifically, Section 13302 of the TCJA modified the rules governing NOL deduction as follows: 
• 
The NOL deduction was limited to 80 percent of taxable income for NOLs arising in tax 
years beginning after December 31, 2017.  In other words, the NOL can only reduce 
taxable income by 80 percent, even if the NOL was large enough to reduce it by more 
(with an exception for farms and non-life insurance companies). 
• 
Repealed the two-year and other specified carryback provisions for NOLs arising in tax 
years ending after December 31, 2017, with the exception of certain losses incurred in 
the trade or business of farming and non-life insurance companies.5    
The CARES Act of 2020 was intended to provide fast and direct economic assistance for 
American workers, families, small businesses, and industries.  Section 2303 of the CARES Act 
made several modifications that temporarily repealed certain restrictions imposed by the TCJA 
affecting NOLs as well as altering other NOL rules.  In particular, the CARES Act made the 
following changes to rules for NOLs arising in tax years beginning after December 31, 2017, and 
before January 1, 2021 (i.e., Tax Years (TY) 2018 through 2020):  
• 
Repealed the 80 percent of taxable income limitation for NOLs claimed in tax years prior 
to 2021.  However, for TY 2021 and later, the 80 percent limitation applies to NOLs 
arising in TY 2018 and later. 
                                                 
4 Farming and non-life insurance companies have unique NOL rules.  The changes and rules discussed in this report 
are focused on the general NOL rules applicable to all other types of taxpayers.   
5 Section 13302 also allowed an indefinite carryforward of NOLs, with the exception of farming and non-life insurance 
companies (which can carry forward an NOL for 20 tax years), and allowed taxpayers to waive the carryback period.  
Page  2 

 
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The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
• 
Repealed the disallowance of NOL carrybacks for NOLs arising in TYs 2018 through 2020 
originally imposed by the TCJA.  
• 
Created a five-year carryback period for NOLs arising in TYs 2018 through 2020 rather 
than the two-year carryback period which had existed before the TCJA. 
These temporary repeals were intended to allow more taxpayers to carry back losses to 
profitable tax years to generate refunds of previously paid taxes.  Section 2303 requires a 
taxpayer with an NOL arising in TYs 2018, 2019, or 2020 to carry back that loss to each of the 
five taxable years preceding the taxable year of the loss unless the taxpayer elects to waive the 
entire carryback period.   
Implementation of Section 2303 of the CARES Act 
Individual taxpayers with an NOL have a choice of two methods to carry back their loss, each 
with separate rules.6  A taxpayer may:  
• 
File a Form 1045, Application for Tentative Refund, which generally must be filed within 
one year after the end of the tax year with the NOL.  A taxpayer can file one Form 1045 
to carry back their loss to all applicable preceding gain years.  The primary advantage of 
filing an application for a tentative refund using Form 1045 is that the original return 
with the NOL does not have to be completely processed by the Internal Revenue Service 
(IRS) before the refund can be approved, thus making the refund “tentative.”  This means 
the refund can be issued prior to verification of the posted tax return.  Additionally, a 
tentative refund can be processed prior to potential referral of the tax return for 
examination.  Notice 2020-26 granted a six-month extension for taxpayers to file 
Form 1045 to apply for a tentative refund from the carryback of an NOL that arose in 
a taxable year that began during Calendar Year 2018 and ended on or before 
June 30, 2019.7    
• 
File an amended return using Form 1040-X, Amended U.S. Individual Income Tax Return.  
Unlike the tentative refund, Form 1040-X has to be filed for each carryback year and 
must generally be filed within the statutory period of three years from the due date of 
the loss year return.   
While the IRS is statutorily required to process tentative refund applications within 90 days, 
interest must be paid on refunds if they are not issued within 45 days.  The same rules for 
paying interest on refunds not processed within 45 days apply for amended returns.  However, 
the IRS is not statutorily required to process amended return carryback claims within 90 days. 
EBLs 
Section 11012 of the TCJA created the EBL limitation under I.R.C. § 461(l).  Prior to the TCJA, 
there was no general limit on the amount of business losses that most noncorporate taxpayers 
could use to reduce their nonbusiness income if the taxpayer was a material participant in the 
business.  The creation of I.R.C. § 461(l) under the TCJA limited the use of such losses to 
$250,000 (or $500,000 for joint returns), with the amounts adjusted for inflation each year.  
Losses above this limit were classified as EBLs and treated as an NOL carryforward.  
                                                 
6 Rev. Proc. 2020-24. 
7 Notice 2020-26, Extension of Time to File Application for Tentative Carryback Adjustment (April 2020). 

 
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The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Noncorporate taxpayers were required to report EBLs on the newly created Form 461, Limitation 
on Business Losses.  The TCJA’s EBL limitation was temporary, applying to TYs 2018 through 
2025.  However, the America Rescue Plan Act of 2021 extended the EBL limitation through 
TY 2026.8   
Section 2304 of the CARES Act retroactively eliminated the EBL limitation for TYs 2018 through 
2020.  As a result, noncorporate taxpayers with an EBL in TY 2018 or 2019 were required to 
amend their tax returns for the applicable years.  Because the CARES Act was passed in 
March 2020, taxpayers had no requirement to report any EBL for TY 2020 (filing year 2021).   
Figure 3:  EBL Changes From the TCJA and the CARES Act 
Time Period 
Applicability of EBLs 
Before the TCJA 
Did Not Exist 
TCJA 
EBLs Applicable to TYs 2018 Through 20269  
CARES Act 
EBLs Applicable to TYs 2021 Through 202610  
Source:  TIGTA analysis of the TCJA and the CARES Act.  
Section 2304 of the CARES Act also clarified previous areas of ambiguity that arose when 
taxpayers attempted to calculate EBLs.  Section 2304 amended I.R.C. § 461(l) to specify that the 
following are not taken into account when calculating EBLs:   
• 
Deductions under I.R.C. § 172 (NOL).  
• 
Deductions under I.R.C. § 199A (Qualified Business Income).  
• 
Deductions, gross income, and gains from employee services.  
• 
Capital losses.  
Implementation of Section 2304 of the CARES Act 
The only method for taxpayers to apply the retroactive changes in I.R.C. § 461(l) was to amend 
their TY 2018 or 2019 returns.  Individual taxpayers could not use Form 1045 because it is used 
to apply for a refund resulting from the carryback of an NOL.  The retroactive change to 
I.R.C. § 461(l) requires applying a previously disallowed loss within the same year that the loss 
arose.   
The deadline to file Form 1040-X is three years (including extensions) after the date that the 
taxpayer filed the original return or two years from the date that the taxpayer paid their tax, 
whichever is later.  A return filed before the unextended deadline is considered filed on the 
unextended deadline (generally April 15).  Figure 4 shows the deadlines to file Forms 1045 and 
1040-X.   
                                                 
8 H.R. 1319, 117th Congress (2021–2022). 
9 The America Rescue Plan Act of 2021 extended the TCJA EBL limitation through TY 2026. 
10 The America Rescue Plan Act of 2021 extended the CARES Act EBL limitation through TY 2026. 

 
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The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Figure 4:  Deadlines to File Forms 1045 and 1040-X 
TY 
Form 1045  
(only available for NOLs) 
Form 1040-X (available  
for both NOLs and EBLs) 
2018 
June 30, 2020 
April 15, 2022 (unless extended) 
2019 
December 31, 2020 
April 15, 2023 (unless extended) 
Source:  TIGTA analysis of IRS Notice 2020-26. 
Results of Review 
The CARES Act was passed to financially assist individual and business taxpayers through the 
pandemic.  However, the IRS was unable to timely process the large volume of tentative refund 
applications associated with the carryback NOLs that were filed as a result of the change in the 
tax law.  In addition to the abrupt reversal in tax law, the IRS’s lack of resources during the 
pandemic caused a backlog for taxpayers applying for a quick refund.  Also, the IRS’s 
Examination functions did not consider changing their approach to ensuring taxpayer 
compliance with CARES Act provisions, even though this reversed tax law associated with the 
TCJA.  Finally, the IRS did not change the criteria it used to identify potentially noncompliant 
cases during NOL processing that would require further scrutiny by the IRS’s Examination 
functions despite the large volume of cases and, at times, significant losses being carried back 
under the CARES Act.   
A Significant Number of Tentative Refund Applications Submitted Under the 
CARES Act Remain in Inventory 
From Fiscal Year (FY) 2020 to FY 2021, the IRS accumulated a large backlog of applications for 
tentative refunds.  Specifically, the number of Forms 1045 considered to be over-aged (i.e., not 
processed within 90 days) increased by more than 
743 percent, from 900 in FY 2020 to more than 7,500 in 
FY 2021.  The number of cases remaining in ending 
inventory (i.e., not processed by the end of the fiscal year) 
increased by 452 percent, from 1,626 in FY 2020 to 8,974 in 
FY 2021.  In addition, although the IRS was unable to 
provide the specific cycle time associated with Forms 1045, 
it did provide cycle times associated with processing both individual and business carryback 
adjustments, which showed that the overall cycle time to process all carrybacks increased 
substantially, from 79 days in FY 2020 to 155 days in FY 2021.11  Figure 5 shows the tentative 
case dispositions during FYs 2020 and 2021.  
                                                 
11 Cycle time is a measure associated with elapsed calendar days. 
More concrete steps should be 
taken to mitigate additional 
interest and costs to taxpayers.   

 
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The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Figure 5:  Statistical Comparison of Applications for  
Tentative Refunds Filed on Form 1045 in FYs 2020 and 2021 
FY 
Actual Closures 
Ending Inventory 
Over-Aged Inventory 
2020 
23,326 
1,626 
900 
2021 
42,190 
8,974 
7,585 
Source:  FY 2021 Accounts Management Carryback Inventory Report.   
Our review of a judgmental sample of 15 cases that included tentative refund applications 
determined that all appeared to have been processed correctly.12  The IRS’s quality review 
process has previously determined that 94 percent of the tentative refund application cases it 
reviewed were processed accurately.  However, TIGTA recently reported that 150 tentative 
refund applications may have been processed erroneously.13  In TIGTA’s report, the IRS agreed 
that these 150 applications were submitted after the filing deadline of July 15, 2020, associated 
with Notice 2020-23.14 
TIGTA also reported that the IRS established temporary procedures to accept eligible carryback 
refunds through dedicated e-fax lines on April 17, 2020.  Only carryback refunds on Form 1139, 
Corporation Application for Tentative Refund, and Form 1045 could be submitted via the 
dedicated e-fax line.  This process was put in place to enable the customer service 
representatives to review and process these applications while working remotely during the 
pandemic.  In addition, the IRS updated its internal processing procedures for carrybacks and 
issued these updates to the customer service representatives in an effort to properly implement 
the new legislative changes.  
IRS officials stated that Forms 1045 were permitted to be filed via e-fax for only a short period of 
time.  The temporary procedures to e-fax the Form 1139 or Form 1045 were no longer 
operational after December 31, 2020.  When we questioned IRS officials about the decision to 
discontinue the use of e-fax, they reiterated that the procedures were intended to mitigate 
delivery issues for processing sites that were closed.  They conveyed that there was significant 
manual effort required to load NOL refund applications submitted via e-fax into the 
Correspondence Imaging System.  They also said some taxpayer submissions included multiple 
faxes that were not complete or were forms other than those associated with Forms 1139 or 
1045.  In addition, they indicated that taxpayers submitted forms other than Form 1045 through 
the dedicated e-fax line.   
Despite the negative attributes of e-fax submission of NOL refund applications cited by the IRS, 
the IRS has begun an assessment to evaluate the overall efficiency of the process.  The 
evaluation will consider expansion of e-fax services for inventory receipts.  The overall impact 
                                                 
12 A judgmental sample is a nonprobability sample, the results of which cannot be used to project to the population.  
The population included taxpayers that filed Forms 461, Limitation on Business Losses, and also submitted either a 
Form 1040-X or a Form 1045.  We used the Form 461 in our match to identify potential filers that were claiming a 
business loss. 
13 TIGTA, Report No. 2021-46-035, Assessment of Processes to Verify Tentative Carryback Refund Eligibility 
(Mar. 2021).   
14 Notice 2020-23, Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic  
(April 2020). 

 
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The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
has been negative for taxpayers submitting tentative refund applications whose potential 
refunds have been delayed as well as for the Federal Government because of the accumulated 
interest due to taxpayers on these delayed refunds.  Figure 6 shows the accumulation of interest 
due to taxpayers in FYs 2020 and 2021.  
Figure 6:  Carrybacks and Interest Paid in FYs 2020 and 2021  
FY 
Interest Due to 
Taxpayer15  
Generated 
Interest on 
Overpayment16 
Total 
2020 
$6,038,405 
$3,501,736 
$9,540,141 
2021 
$27,230,688 
$5,381,076 
$32,611,764 
Total 
$33,269,093 
$8,882,812 
$42,151,905 
Source:  IRS Individual Master File Account Reports for Carryback Interest for FYs 2020 
and 2021.17  
The amount of interest accumulated due to the IRS’s inability to process applications for 
tentative refunds in a timely manner totaled over $42 million for FYs 2020 and 2021.18  IRS 
officials stated that they do not believe the amount of interest paid is a reliable or meaningful 
measure and stressed that the cost to the Government is mitigated because the Government 
has use of the funds while the applications are being processed, thus reducing the need for 
borrowing the funds.  However, the interest rate the IRS pays on individual (noncorporate) 
refunds is three percentage points higher than the rate the Government pays for Federal  
short-term borrowing.  In a recent report, the Government Accountability Office recognized that 
a portion of annual refund interest required to be paid is due to circumstances outside of the 
IRS’s control but that managing returns with interest does fall under the IRS’s purview and is an 
expense to the Department of the Treasury.19  It also reported that the IRS has not established a 
mechanism to effectively identify, monitor, and mitigate issues contributing to refund interest 
payments. 
While the general intention of tax law changes associated with the CARES Act was to move 
money into the hands of taxpayers quickly, the backlog and interest costs do not include the 
opportunity cost that taxpayers experienced as a result of potential refunds not being processed 
timely.  The IRS recently announced a surge initiative to have employees from other functions or 
operations, some with Accounts Management experience within the past two years, detailed 
back to those respective operations to assist with reducing the backlogs.  The IRS did not 
confirm that employees were being moved to work the specific backlog of Forms 1045 but 
                                                 
15 Interest associated with an IRS Master File Transaction Code 770, which credits a tax period for interest on 
overpayment. 
16 Interest due on overpayment associated with an IRS Master File Transaction Code 776, which credits a tax period 
for interest associated with overpayment. 
17 Individual Master File is the IRS database that maintains transactions or records of individual tax accounts. 
18 We calculated the $42 million in interest by totaling the amounts reported by the IRS on an internal Individual 
Cumulative Report associated with tentative carrybacks.  We totaled the amounts reported as interest due to taxpayer 
and interest due to overpayment, or transaction codes 770 and 776 respectively. 
19 Government Accountability Office, GAO-22-104938, Tax Filing, 2021 Performance Underscores Need for IRS to 
Address Persistent Challenges, p. 25 (April 11, 2022). 

 
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The IRS’s Inability to Timely Process Noncorporate Applications for Refund of Net Operating Losses  
Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
indicated that it was possible that some employees selected to assist with backlogs had worked 
in the area prior to leaving.  Given the cost to taxpayers to date, more concrete steps should be 
taken to mitigate additional interest and costs to the extent possible. 
The Commissioner, Small Business/Self-Employed Division, and the Commissioner, Wage and 
Investment Division, should: 
Recommendation 1:  Devote additional resources to process the tentative refunds faster and 
reduce interest payments.   
 
Management’s Response:  IRS management agreed with this recommendation and 
stated that it has been implemented.  On February 2, 2022, additional resources were 
devoted to all inventories, including tentative refunds. 
Recommendation 2:  Develop contingency plans, specific to the processing of Forms 1045, so 
that taxpayers are not adversely affected by a future cessation in operations.  
 
Management’s Response:  IRS management agreed with this recommendation and 
stated that it has been implemented.  As of October 1, 2021, Accounts Management 
customer service representatives are now classified as frequent teleworkers, and all who 
meet telework eligibility criteria are able to telework 100 percent of the time in the event 
of future cessation of operations.    
The Commissioner, Wage and Investment Division, should: 
Recommendation 3:  Complete the evaluation of filing tentative refunds by e-fax to determine 
its effectiveness.   
 
Management’s Response:  IRS management agreed with this recommendation and 
stated that they will complete an evaluation of the Carryback e-Fax initiative that was 
previously used as a temporary measure.   
Risk Criteria and Examination Plans Were Not Changed With the Significant 
Change in Tax Law  
Even though the law reversed some of the carryback loss provisions of the TCJA, the IRS did not 
make adjustments or update its Examination plan to ensure that taxpayers complied with the 
provisions of the CARES Act.  IRS officials stated that they considered whether updates were 
necessary and determined that the plan did not require adjusting.  We were provided a 
Compliance plan associated with Sections 2303 and 2304 of the CARES Act, but the risks 
detailed in the plan were substantially associated with characteristics of the TCJA.20  Although 
this is a starting point for assessing risk associated with CARES Act changes, the compliance plan 
was dated May 2020 and officials stated that it has not been updated since then.     
                                                 
20 As an example of the risks associated with the TCJA, the IRS estimated that 24,809 taxpayers filed Form 461 
claiming $32.5 billion in EBLs under the TCJA in TY 2018.  TIGTA obtained data from 4,815 Forms 461 filed 
electronically and found that only 1,949 of the Forms 461 actually claimed losses, totaling $1.5 billion in TYs 2018 and 
2019.  The remaining forms were filed even though the taxpayers did not have a loss. 

 
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Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
CARES Act provisions presented a different compliance risk, however, and IRS officials stated 
that the changes were generally more beneficial to the taxpayer.  Due to these provisions, IRS 
officials believed that compliance risk was not as high in this area as in other areas and that 
issues would be more likely to arise in 2021 when NOLs become more restricted again.  As a 
result, all of the returns filed after the tax law changes associated with the CARES Act would be 
evaluated with the same criteria as those returns filed under the TCJA.  This is concerning 
because the CARES Act and the TCJA established different criteria for how taxpayers could claim 
NOLs.  For example, the CARES Act reversed some TCJA provisions by removing the limits of 
individuals claiming NOL deductions and providing a mechanism to carry back the losses and 
offset past gains.  
The IRS provided a summary of its implementation plans for Sections 2303 and 2304 of the 
CARES Act, as compiled in its Legislative Analysis, Tracking, and Implementation System.21  After 
reviewing entries in the system, we confirmed that there were no plans to change Examination 
plans as a result of the CARES Act and that the IRS will determine compliance with the CARES 
Act after the first returns are filed.  The IRS established December 31, 2023, as the due date for 
its efforts to determine compliance with the CARES Act.    
Criteria to refer applications for tentative refunds to Examination were not updated  
When processing a taxpayer’s Form 1045, Accounts Management customer service 
representatives process the application for tentative refund using specific criteria known as 
“CAT-A” that directs them to refer cases to IRS examination functions for classification if they 
meet this criteria.22  We were informed that CAT-A criteria for issues related to Form 1045 had 
not been updated since 2009.   
In FY 2021, 909 (5 percent) of the 17,469 Forms 1045 were referred for classification and 
190 (1 percent) were ultimately selected for examination.  In 154 (17 percent) of the 909 cases, 
the taxpayer was requesting a refund of more than $2 million.  Figure 7 provides the disposition 
of the 909 cases, which shows that 75 percent of the Forms 1045 were accepted by classification 
and sent forward for processing, while 21 percent were selected for further examination.   
                                                 
21 The Legislative Analysis, Tracking, and Implementation System is a legislative affairs system that manages, 
coordinates, and tracks actions taken by the IRS to implement legislation impacting the IRS. 
22 Classification is a process in IRS examination operations intended to determine whether a return should be 
1) Selected for Audit, 2) Accepted as Filed, 3) Fully or Partially Disallowed, or 4) Not Considered.  Classifying returns 
should be based on an evaluation of the whole return as well as a consideration of individual line items found on the 
return.  Evaluation of the whole return requires classifiers to make a judgment based on their knowledge and 
experience. 

 
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Figure 7:  Disposition of Cases Referred to  
Examination Classification Using CAT-A Criteria 
 
Source:  IRS FY 2021 CAT-A data.  Dispositions of cases not meeting 
CAT-A criteria and cases not considered are not reflected in the figure 
as they make up less than 1 percent of the total dispositions. 
Recommendation 4:  The Commissioner, Small Business/Self-Employed Division, and the 
Commissioner, Wage and Investment Division, should evaluate and update their compliance 
strategy associated with the CARES Act to determine if it matches the risks associated with 
reversing TCJA provisions.   
 
Management’s Response:  IRS management disagreed with this recommendation and 
stated that the Small Business/Self-Employed Division Examination function evaluated 
the risks associated with changes to the NOL deduction provisions and completed 
training, publication of materials, and Internal Revenue Manual updates.  It also stated 
that CARES Act provisions have since expired.  
 
Office of Audit Comment:  Tax returns involving CARES Act NOL provisions 
were submitted for TYs 2018 through 2020.  The statute of limitations for these 
returns will not expire until Calendar Year 2024 at the earliest.  Therefore, TIGTA 
maintains that it would be prudent for the IRS to consider the risks associated 
with CARES Act NOL provisions for the TY 2018 through TY 2020 returns it will be 
examining in the coming years. 
21%
75%
3%
1%
Selected
Accepted
Other
Disallow

 
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Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
Procedures Did Not Ensure That Examinations of Individual Taxpayers 
Consider Losses Filed by Taxpayers Under the CARES Act  
In a separate review of corporate applications for tentative refunds, TIGTA found that: 
• 
Eight examinations of Forms 1120, U.S. Corporation Income Tax Return, closed by the 
Small Business/Self-Employed Division resulted in adjustments on five cases, with no 
change to the remaining three cases. 
• 
In three of the five cases with an examination adjustment, part of the tentative refund 
issued should have been recaptured, but the examiner failed to do so.23  
In all three cases, the examination resulted in a smaller NOL amount available to carry back.  
However, when the examiners completed the Form 4549, Report of Income Tax Examination 
Changes, the examiners did not consider the impact on tax computations from refunds already 
issued based on the processed Forms 1139. 
The IRS agreed with these findings and took the following actions in order to raise examiner 
awareness, detailed in an Interim Guidance Memorandum:   
To help ensure all actions taken by the taxpayer are considered during the examination, 
examiners should ask the taxpayer if the loss was carried back, and review the Integrated 
Data Retrieval System (at the beginning of the examination and again during the 
preparation of the Revenue Agent Report (Form 4549)) for all eligible carryback years in 
search of category and/or transaction codes indicating the loss was carried back.   
Once finalized, this guidance will be incorporated into the Internal Revenue Manual.  The 
procedural changes apply to both the Small Business/Self-Employed Division and the Large 
Business and International Division, covering both individual and corporate NOL filings.  
In our review, we identified 34 individual taxpayers examined by the IRS who had also filed a 
Form 1045.  There was no assessment in 21 of the 34 cases, while three cases resulted in an 
assessment for which the taxpayer had to pay additional tax.  Although our review of these 
cases did not find a similar condition associated with individual taxpayers, we agree with the 
IRS’s efforts to expand controls to examinations concerning both corporations and individuals.  
 
                                                 
23 TIGTA, Report No. 2022-35-049, Compliance Efforts Are Needed to Address Refund Claims Reported on Form 1139 
That Are Based on the CARES Act Net Operating Loss Carryback Provisions (Sept. 2022).   

 
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Appendix I 
Detailed Objective, Scope, and Methodology 
Our overall objective was to assess the IRS’s efforts to promote noncorporate business taxpayer 
compliance with tentative refund applications and claims under Section 2303 and 2304 NOL 
provisions of the CARES Act.  To accomplish our objective, we: 
• 
Determined whether the IRS established controls to ensure that the NOL amounts 
claimed on Form 1045 (Line 10) were accurate and complied with the pertinent 
provisions of the CARES Act.   
• 
Evaluated, to the extent possible, a judgmental sample of Forms 1045 to determine if the 
IRS processed Forms 1045 in accordance with the provisions of the CARES Act while 
considering established controls.1  
• 
Determined whether those Forms 1045 received and processed under CARES Act 
procedures were associated with the EBL limitation provision of the TCJA. 
• 
Assessed whether the IRS’s examination coverage and methods associated with 
individual NOLs and carrybacks, prior to the TCJA and during the TCJA, were used to 
develop a strategy for CARES Act changes.  
Performance of This Review 
This review was performed with information obtained from the Large Business and International, 
Small Business/Self-Employed, and Wage and Investment Divisions located in Washington, D.C.; 
Lanham, Maryland; and Atlanta, Georgia, respectively, and in TIGTA offices located in 
Denver, Colorado, and Holtsville, New York, during the period May 2021 through May 2022.  We 
conducted this performance audit in accordance with generally accepted government auditing 
standards.  Those standards require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and conclusions based on 
our audit objective.  We believe that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objective.   
Major contributors to the report were Matthew Weir, Assistant Inspector General for Audit 
(Compliance and Enforcement Operations); Robert Jenness, Director; Curtis Kirschner, Audit 
Manager; John Chiappino, Lead Auditor; and Robert Steele, Auditor.   
Validity and Reliability of Data From Computer-Based Systems  
We performed tests to assess the reliability of data associated with Forms 1045 from the 
Correspondence Imaging System.  Before relying on the data, we ensured that the files 
contained the specific data elements we requested.  In addition, we selected data from the 
extract and verified that data in the extract reconciled to data captured in the Accounts 
Management Services system and within the Integrated Data Retrieval System.  We also 
                                                 
1 A judgmental sample is a nonprobability sample, the results of which cannot be used to project to the population. 

 
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performed analyses to ensure the validity and reasonableness of our data.  Based on our test 
results, we determined that the data were sufficiently reliable for purposes of this report. 
Internal Controls Methodology 
Internal controls relate to management’s plans, methods, and procedures used to meet their 
mission, goals, and objectives.  Internal controls include the processes and procedures for 
planning, organizing, directing, and controlling program operations.  They include the systems 
for measuring, reporting, and monitoring program performance.  We determined that the 
following internal controls were relevant to our audit objective:  the process for planning, 
organizing, directing, and controlling program operations for evaluating compliance with 
applications for tentative refunds and NOL carrybacks.  We evaluated these controls by 
reviewing annual workplans; case processing; and examination procedures, metrics, and 
measures, as well as interviewing management and employees. 
 

 
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Appendix II 
Management’s Response to the Draft Report 
 
 

 
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Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
 
 

 
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Under the CARES Act Delayed Taxpayer Refunds and Cost Millions of Dollars in Additional Interest 
 
 
 

 
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Appendix III 
Abbreviations 
CARES 
Coronavirus Aid, Relief, and Economic Security 
EBL 
Excess Business Loss 
FY 
Fiscal Year 
I.R.C. 
Internal Revenue Code 
IRS 
Internal Revenue Service 
NOL 
Net Operating Loss 
TCJA 
Tax Cuts and Jobs Act 
TIGTA 
Treasury Inspector General for Tax Administration 
TY 
Tax Year 
 

 
 
 
 
 
 
 
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Or Write: 
Treasury Inspector General for Tax Administration 
P.O. Box 589 
Ben Franklin Station 
Washington, D.C. 20044-0589 
 
 
Information you provide is confidential, and you may remain anonymous.

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