IRS 2006 audit looking back to 1995 NOL

[DMICPA]

IRS is auditing a 2006 Corp. In reviewing the 1120, she notices a NOL carryforward from 1995.

Now the agent wants the checks, Bank records etc. from 1995 to prove the NOL. Client suffered a severe fire and flood damage and no longer has 1995 records. Loss is proveable etc.

Questions:

Isn't this becoming an audit of 1995? The statute is long gone I imagine.

If the agent can't verify the records, she may disallow the NOL.

She says the IRS may also have lost the 1995 return.

We are talking a $100,000 NOL here. Can the IRS just disallow it?

What can I say to the agent?

[JG EA]

Since recordkeeping for an NOL is supposed to kept for as long as the NOL is carried forward and 3 years beyond that, then they can ask for the information. But if records are lost the IRS says In ITG FAQ #4

Every effort should be made to find lost records, or partial records that may have "survived" a disaster. If partial records are recovered, they are the best place to begin a reconstruction.

A reconstruction of records is best approached in reverse order. In other words, begin with the end of the year and work backward. The following steps may be helpful in the reconstruction process:

Then it lists the steps.

http://www.irs.gov/businesses/small/...147164,00.html has some points on record reconstruction after a disaster..

[DMICPA]

NOL and lost records

Thanks for the information JG.

I will do what I can but hope the agent sees that the client is honest etc and will work with what they have. To just disallow something that the IRS has had several years to audit and question seems reckless. If the IRS can't find a tax file which they also should have, why penalize the taxpayer.

Where is the "service" in IRS?

[New York Enrolled Agent]

Thanks for the information JG.

I will do what I can but hope the agent sees that the client is honest etc and will work with what they have. To just disallow something that the IRS has had several years to audit and question seems reckless. If the IRS can't find a tax file which they also should have, why penalize the taxpayer.

Where is the "service" in IRS?

Remember - as the Courts ALWAYS note deductions are a matter of legislative grace and the taxpayer bears the burden of showing they are entiltled to such deductions. The following is from a TC Memo case (2002-244) which involved an NOL in an S-Corp. The words are not encouraging to your client. Citations have been omitted.

Petitioners' counsel acknowledged at trial that petitioners bear the burden of proof in this case. Petitioners, as taxpayers attempting to deduct NOLs, bear the burden of establishing both the existence of the NOLs and the amount of any NOL that may be carried over to the subject years. ... Such a deduction is a matter of legislative grace; it is not a matter of right. .... Whereas petitioners argue that the composition of the NOLs is not in issue, we conclude to the contrary. Respondent indicated both in his trial memorandum and in his opening statement at trial that petitioners' substantiation of the existence, amounts, and years of the NOLs underlying the disputed NOL carryovers was in issue. ... We also note that petitioners claim to have incurred NOLs in numerous years, two of which are 1981 and 1982, and that we understand petitioners at the least to have acknowledged that part of the disputed NOL carryovers is attributable to 1981 and 1982 NOLs. 5 In that 1981 and 1982 are both more than 15 years before 1998, the first year in issue, [pg. 1364] and that respondent determined in the notice of deficiency that the 15-year carryover period had expired, we cannot fathom how petitioners could otherwise establish their entitlement to deduct any part of the subject NOL carryovers were they not to substantiate the composition of those carryovers.