Tax Court Reminders NOL Carryovers and IRS Refund Errors

If you're claiming a net operating loss (NOL) carryover on your tax return, make sure you have the documentation to support it. If the IRS audits your return, you'll need to prove not only the amount of the loss you're carrying forward but also that the original NOL was valid in the first place. Simply providing copies of prior-year tax returns may not be enough. Taxpayers should keep records that support how the original loss was calculated and how it was carried forward from year to year. Without adequate documentation, the IRS could disallow the deduction.

A recent Tax Court case also serves as a reminder that taxpayers are generally required to repay tax refunds they were not entitled to receive—even if the refund was caused by an IRS error. In this case, a corporation properly filed its employment tax return and paid approximately $121,000 in payroll taxes. Due to an IRS processing mistake, the agency incorrectly recorde

d the company's tax liability as zero and issued a refund for the full amount. Two years later, the IRS corrected the error, assessed the unpaid employment tax, and began collection efforts. The corporation argued that the IRS used the wrong procedure to recover the refund, but the Tax Court ruled in favor of the IRS. The decision confirms that taxpayers may still be responsible for repaying an erroneous refund, even when the mistake originated with the IRS.