Audit, 2008 NOL

[Ranger]

Client received a notice of examination for the year 2010. The preliminary items listed for examination are Schedule C expenses and NOL carry forward.

The NOL came from a huge loss in 2008. Since the due date of the 2008 return was over three years ago, can the IRS examine the 2008 return to determine the amount deductible and carried forward in 2010?

[michaelmars]

yes since you are using it in 2010, an open year.

[DANRVAN]

822,026. Examination of closed years.

A closed year may be examined or re-examined even if IRS doesn't show probable cause to suspect fraud (¶ 822,025) as long as:

... the examination is conducted pursuant to a legitimate purpose,

... the inquiry is relevant to that purpose, and

... the information sought is not already in IRS's possession. If the taxpayer establishes that IRS's actions constitute an abuse, the examination is barred. However, the mere passing of the normal three-year statute of limitations on assessment (¶ 838,001) is not, by itself, proof of an abuse. 7

________________________________________

7

U.S. v. Powell, Max, (1964, S Ct) 14 AFTR 2d 5942, 379 US 48, 13 L Ed 2d 112, 64-2 USTC ¶985

[jainen]

>>due date of the 2008 return was over three years ago<<

Understand that the IRS can examine pretty much anything they want. They may not be able to make a late assessment, if taxpayer records are mostly in order, but you are a long ways from that point.

If the "huge loss" was more than 25% of his income, the statute of limitations may be SIX years. If it was fraudulent, there may be no time limit. That's why invoking the statute of limitations is technically difficult. You might trigger a fraud investigation. Just saying. Other than the nuisance factor, is there some reason the taxpayer can't support what he claimed?

[Lion EA]

I think I discovered that the IRS can go back to the beginning of all depreciation, which could be 40 years ago, so I would think they can trace back an NOL being used in the year under audit.

[Ranger]

Thanks for all your replies. That gives me a better idea of what to expect. We are waiting for the auditor to arrange the initial phone interview.