Estimated tax penalties recouped via NOL

[equinecpa]

Ok I"m drawing a blank. My client has a farming NOL from 2007. She is carrying it back to 2002. The NOL carryback exceeds her AGI for 2002. In 2002 she paid estimated tax penalties of $1500 are these recouped via the NOL carryback? Do I report them on the 1040X as payments are does the IRS adjust this automatically -I'm thinking it's not reported as we're dealing with tax paid on the 1040X but I thought I'd double check.

Thanks

Carolyn

[Bees Knees]

I don’t have a citation for this, but I seem to remember a long time ago reading something about not being able to get interest and penalties back on a tax year to which you are carrying back an NOL. I think it is sort of like the SE tax issue. You can’t use an NOL to get SE taxes back.

[ChEAr$]

I second the notion

I don’t have a citation for this, but I seem to remember a long time ago reading something about not being able to get interest and penalties back on a tax year to which you are carrying back an NOL. I think it is sort of like the SE tax issue. You can’t use an NOL to get SE taxes back.

Too bad Bees and I can't actually remember where we put that citation!

[WhiteOleander]

Ok I"m drawing a blank. My client has a farming NOL from 2007. She is carrying it back to 2002. The NOL carryback exceeds her AGI for 2002. In 2002 she paid estimated tax penalties of $1500 are these recouped via the NOL carryback? Do I report them on the 1040X as payments are does the IRS adjust this automatically -I'm thinking it's not reported as we're dealing with tax paid on the 1040X but I thought I'd double check.

Thanks

Carolyn

The IRS says that you cannot recoup the underpayment penalties because an NOL carryback does not change the fact that the payments were originally late. So, each year stands alone to determine if there is an underpayment. Any change from later years won't change that.

[Bees Knees]

I found the citations:

IRC Section 6601(a) is the general provision where the IRS charges interest on underpayment of tax liabilities.

IRC Section 6601(d)(1) says:

Net operating loss or capital loss carryback

If the amount of any tax imposed by subtitle A is reduced by reason of a carryback of a net operating loss or net capital loss, such reduction in tax shall not affect the computation of interest under this section for the period ending with the filing date for the taxable year in which the net operating loss or net capital loss arises.

As to the estimated tax penalty, IRS Pub 505 says on page 7 that you can use a net operating loss carryover as an adjustment to income for purposes of figuring the amount of estimated taxes due. That means an NOL that was not used up in the previous year and that is being carried over to the current year can reduce the amount of estimated taxes due in the current year. It does not say an NOL from the future that is being carried back to the current year can reduce estimated taxes for the current year.

Thus, an NOL being carried back to a prior year does not change the estimated tax penalty or interest due on the late payment of tax that was originally incurred in that year.