Adjusting Tax Credit Carryforwards

Adjusting tax credit carryforwards

February 08, 2016

Unused tax credits that are being carried forward can be adjusted by both the taxpayer and the IRS, even after the statute of limitations has run on a tax audit, the IRS said.

The agency made the statement in a private letter ruling released in late November. The ruling is Private Letter Ruling 201548006.

The IRS normally has three years to audit a tax return. The three years run from the due date for the return or, if later, when the return was actually filed. Meanwhile, a taxpayer who wants to adjust what he claimed must do so by filing an amended return within three years after the original return was filed or, if later, two years after the tax was paid. 

A company that owned restaurants failed to calculate correctly the amount of tax credits it was entitled to under section 45B of the US tax code for the employer share of social security and Medicare taxes it paid on employee tips over the period 1998 through 2012. The tax credit can be claimed in lieu of deducting the taxes.

By the time the company discovered the error, the statute of limitations had closed on tax years before 2010. It amended its 2010 through 2012 tax returns and calculated the credits accurately on its 2013 return.

Had it calculated the credits accurately before 2010, then it would have been entitled to a larger credit carryforward into 2014.

The IRS said it can increase its tax credit carryforward, citing precedent involving the investment tax credit.

Most unused tax credits for businesses can be carried back one year and forward up to 20 years under section 39 of the US tax code.

A 1982 revenue ruling (Revenue Ruling 82-49) says that the investment tax credit does not have to have been claimed on a tax return, or in a timely claim for a refund for the year the asset went into service, before it can be carried forward to an open tax year.

The IRS said the same principle should apply to section 45B credits. “[I]t is clear that a general business credit originating from closed years and being carried into open years in arriving at tax due can be adjusted to correct errors under the applicable provisions of the law by both the Service and Taxpayer.” 

However, the full effects of the extra tax credit need to play through the tax return for the closed year so that the accurate amount of credit is carried forward. For example, if the extra credit would have been used to reduce the taxpayer’s taxes in the closed year, then it cannot be carried forward.