Carryforwards & Statute of Limitations

[John3cpa]

Does the carryforward of a tax attribute, say cap losses or foreign tax credit, extent the statute of limitations on the entire tax return of the year the loss or credit originated or just on the attribute being carried over?

[Brian EA]

Does the carryforward of a tax attribute, say cap losses or foreign tax credit, extent the statute of limitations on the entire tax return of the year the loss or credit originated or just on the attribute being carried over?

The statute of limitation expires on the tax return. The capital loss and or foreign tax credit are carried over

[John3cpa]

To clarify

Say you have unused foreign tax credit of 1200 at the end of 04 and it sits there unused until 2008 when it is either partly or entirely used. Does that now open up the entire 04 year for audit or just the income that generated the credit and related calculations of that credit?

[Koss]

Carryforwards

Say you have unused foreign tax credit of 1200 at the end of 04 and it sits there unused until 2008 when it is either partly or entirely used. Does that now open up the entire 04 year for audit or just the income that generated the credit and related calculations of that credit?

Fascinating question.

I don't think the use of the carryforward really "opens up" an earlier year for a genuine audit of any type. If the three year window has closed, I don't think the IRS would actually try to change a person's tax liability for that year.

What I can see happening very easily is this, and perhaps this answers your question:

A review of an earlier year that is now "closed" might determine that the credit was calculated incorrectly. Correcting the calculations probably wouldn't change the tax liability for that year (because the time limit has passed) but the recalculation could be used to change or disallow the amount of credit carried forward.

Put another way: in your example, if the credit was incorrectly computed on the 2004 return, and the IRS conducts a real audit of the 2008 return sometime during 2009, they can't go back and change the 2004 return. But by properly determining what the calculations should have been on the 2004 return, and perhaps even earlier years, the IRS can change or disallow the amount of the credit used on the 2008 return and any other open year.

Way to get screwed, huh? You could find yourself in a situation where you didn't take as much carryforward credit as you could have in an earlier year, but because you were effectively required to use it that year, it's no longer available for the open years. And you can't go back and amend the year that you should have used it because it's too late.

But I suppose in other cases it could work in the taxpayer's favor.

Feels a bit like what happens when you screw up depreciation, and take the wrong amount for seven years. Good luck finding an equitable way to fix it that doesn't trigger a lot of unintended consequences. I think the IRS is still grappling with this particular problem.

Burton

[John3cpa]

"Fascinating" Answer

Burton,

Good answer...thanks!

Client (an attorney from Puerto Rico, now retired to the mountains of NC) seems concerned about that 04 carryover of foreign tax credit, which makes me a little concerned now as well since i am the preparer. In any case, we decided not to show a carry forward of unsused foreign tax credit into the 2005 year. Tax liability for 05 stayed the same anyway.

I like your indepth answer, thanks again!!