NOL Carryback - Error on prior return

Technical topics regarding tax preparation.
#1
swgordon  
I have a client that had an NOL on their 2016 return. They did not elect to carry it forward so I told them i would amend 2014 to carry it back after tax season. When I look at the 2014 return, they claimed an $85,000 Unlawful Discrimination Legal Fee deduction above the line. In looking at the rules related to that, you can only claim an above the line deduction to the extent there is income related to the legal case. There was no income reported so this should have been an itemized deduction subject to 2%. They were in AMT so they would have received no benefit from it.

Question is, since the 2014 year is closed, can I amend to carry back the NOL and not make any other adjustments? I know that normally if you amend you must fix all errors and not just the ones that give the client benefit.

We are looking at a $6k refund from the NOL so if I have to fix the legal fees they would end up owing quite a bit and it would not be worthwhile.
 

#2
Joan TB  
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When you prepare a 1040X for a NOL carryback, I don't think you are allowed to make any other changes on that same 1040X. If you have other changes, you are supposed to do another 1040X. Not sure which one they would want (or require) first. So not really sure if that answers your question...
 

#3
swgordon  
OK thank you. So i guess the question is am I opening myself to any potential issues if I amend a return for an NOL carryback that I know has other errors. Do I have a responsibility to amend and fix the errors prior to the NOL amendment?

This is a closed year. Will filing the NOL carryback amendment reopen the year for review?
 

#4
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"Do I have a responsibility to amend and fix the errors prior to the NOL amendment? "

You have a responsibility to inform the client of the error, the potential ramifications/penalties/interest arising from the improper treatment, and to ultimately follow their decision.

Document in writing (e-mail) and file away.

Based on their decision, you can decide whether or not you should disengage now or fire them after the engagement for ethical reasons.
 

#5
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swgordon wrote:Do I have a responsibility to amend and fix the errors prior to the NOL amendment?


You have a responsibility for preparing an accurate return based on the information you know or reasonably should know.
When you amend a return, you take responsibility for everything on that return, not just select items or the items being changed on the return.
This is why I explain to clients that amending a return I didn't prepare is often more costly than preparing the original return would have been.
~Captcook
 

#6
swgordon  
OK, I understand that. I will inform the client of the error but if they do not want to fix the original error and only want to amend for the NOL carryback am I opening myself up for possible preparer penalties?

The 2014 return is now closed. Even if I were to amend it and showed a balance due, the IRS would not accept the additional tax. I could then amend for the NOL and would have the exact same result.

I want to make sure that I go about this the proper way.

CaptCook, this is a slightly different scenario because the IRS will not accept any other changes/corrections on the NOL carryback. I can not fix that error on this amended return. I would have to amend the return first and then amend again for the NOL.
 

#7
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swgordon wrote:[T]he IRS will not accept any other changes/corrections on the NOL carryback. I can not fix that error on this amended return.


That's not necessarily true. The collection statute may have expired, but that doesn't mean you ignore that dynamic when amending a return. This would be a situation where I would explain to the client that I won't be carrying back the loss because they actually received an incorrect benefit on the original return. Even net of the NOL, there is no additional refund to receive.

Since the NOL wouldn't carryforward from 2014 to 2015, it is gone and you move on.
~Captcook
 

#8
exao  
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From post # "Will filing the NOL carryback amendment reopen the year for review?"

Yes, to the extent of the NOLCB amount.
 

#9
dave829  
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swgordon wrote:Do I have a responsibility to amend and fix the errors prior to the NOL amendment?

I think you do. In Rev. Rul. 81-88, 1981-1 C.B. 585, the IRS pointed out that in carrying back an NOL to a year that is otherwise closed by the statute of limitations, the IRS is entitled to offset the NOL carryback by audit adjustments that would otherwise be barred in the closed year. The IRS cited Commissioner v. Van Bergh, 209 F.2d 23 (2d Cir. 1954); and Phoenix Coal Co. v. Commissioner, 231 F.2d 420 (2d Cir. 1956), as support for its position.

So, I don't think it would be ethical to prepare an amended return that only includes the NOL carryback. I think you have to include the adjustment for the erroneous deduction.
 

#10
swgordon  
OK thanks for the input. I will discuss with the client but I think it would be best to just let this one go. She got way more benefit from the original 2014 deduction than she would have gotten from the NOL carryback.
 


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