An ethical question?

[appelman]

In Year 1, taxpayer has a substantial tax liability, which he is unable to pay, and which is ultimately designated as currently not collectible. In Year 3, he has a modest NOL. If he lets it carry back, it will be eaten up in Year 1, and the IRS will say thank you and apply the tentative refund to the debt. If taxpayer waives the carry back, the NOL might save him some future tax liability. I can't see that there is anything illegal about waiving the carry back, but is it ethical to do so, considering that he has outstanding tax liability in the carryback year?

[taxea]

ethical or not the right thing to do is carry it back. After all the longer it sits in current status the more interest it will accrue and the higher the liability will be later.

[JohnH]

Interesting question. At first glance it seems to me he can legally and ethically elect to forego the carryback period. If the NOL helps produce a refund in a future year, IRS will still sieze it. But he can reduce his withholding to avoid a refund in future years (also legal), and thus eventually he would derive financial benefit from the NOL.

I'll be interested to hear what others say about this. Keeping in mind, of course, that most of us do not see our job as the business of enforcement and are supposed to be looking out for the client's best interests ( the IRS has plenty of resources available to look after the government's interests)

[taxea]

John in the interest of the client lowering the liability which causes less interest to accrue would be in the interest of the client don't you think?
Knowing the IRS I expect them to require the carryback on taxpayers with existing liabilities any day now.

[JohnH]

If the client is in such desperate straits that the previous taxliability is uncollectible, I doubt the additional accrued interest is of much concern to them. They are probably much more concerned with keeping their current tax liability to a minimum.

And with interest at 4% plus the 6% FTP penalty, paying an effective 10% APR on borrowed money is probably a bargain for someone struggling financially. Sometimes the decision hinges on much broader financial matters than the narrow question of the tax liability. We need to have the financial expertise to properly analyze the situation and present the client with all their options so they can make the best decision under their present circumstances. Simply advising them to pay up ASAP as a knee-jerk response isn't really rendering good advice or providing proper professional service, IMO.

If the IRS wants to require taxpayers to carry back the NOL in situations like this, they know how to make those changes. After all, they own the rule book. They've been aware of this situation for how many years (20 - 30+ ?) and yet haven't changed the rules. So I'll simply have to take your word for the statement that they are contemplating changing it "any day now". But until that day arrives, there's no need for tax preparers to be eager to do their work for them.

[ChEAr$]

ethical or not the right thing to do is carry it back. After all the longer it sits in current status the more interest it will accrue and the higher the liability will be later.

Disagree with my learned Hawaiian colleague. The only right thing to do is to explain both options and let client make the decision.

[Gretel]

I agree with John that we have to look at the total financial picture. Chances are that he needs every single dollar right now just to make it, this year, next year, who knows. It is also my experience that people in such dire straits don't care about accruing penalties and interest.

Nobody knows the future, so, agreeing with Harlan, the client needs to be advised of consequences for each option, and it's the client who needs to decide. If he makes good money in the future, IRS will get all of their share. If he fails and files for bankruptcy, IRS most likely looses everything anyway.

We all need crystal balls right now.

[Kram BergGold]

Critical Question

Is year 3, 2012 or a fiscal year? If not, the period for electing to forego the carryback is over and you have to carry the loss back.