passive loss carryback

[jlew1229]

A new  client just received a letter from the IRS for 2017.    It states that the tax preparer they had in 2017  did not elect to forego the 2017 net operating loss carryback period.   The passive loss they have is a result of years of un-allowed passive losses on a limited partnership K-1.   2017 was the final year of the K-1 which freed all these passive losses.   I don't have the K-1 yet, to find out what type of passive loss this is, ( ordinary, capital gain, 1231, 1250 etc.) not sure if that matters,  but is  there a type of passive loss that does not require it to be carried back.   The IRS is giving them 30 days to amend 2015, 2016 and 2017 tax returns to carryback this loss.    The passive losses were not allowed in prior years, so I am not sure how amending them will change any prior year return, but wanted to reach out to understand what I might be missing.

Any help is greatly appreciated.   

[BobKamman]

You are no longer claiming a passive loss on the 2015 and 2016 returns.  You are claiming a net operating loss.  Your post states that IRS wants an amended return for 2017, but that's the NOL year, right?  What was done with the NOL when it was not carried back?  Was it claimed on 2018 on later years?  And why is IRS looking at 2017 just now?

[jlew1229]

  The previous tax preparer never said it was the final year K-1, so all the previous years passive loss carry overs just disappeared.  We filed an amended 2017  return to indicate it was a final year K-1 to bring forward the prior year passive losses   Then we amended 2018 as well, since now the loss was carried forward.      

The IRS letter stated they looked at the original return that was filed and no election was made to forego the 2017 operating loss carryback.  Any election filed with the 2017 1040x ( filed May 2020) was filed late and can not be allowed.  They want the 2017 loss carried back to the correct year.   

So the previous year passive loss carryovers not utilized on the 2017  1040X return become NOL losses and we have to amend 2015 and 2016?  and start with the total NOL from the 2017 return   on the amended 2015 return and keep carrying it forward?       It doesn't matter what type of passive loss it was?   or that it was accumulated over many years?   

[sjrcpa]

Once you have an NOL any passive considerations that generated it are no longer applicable.

[jlew1229]

Thanks,    

Just clarifying.   So the many years of un-allowed passive losses become NOL losses in 2017 when the Final year K-1 accumulated losses came forward and were not able to be used?   Doesn't matter what type of passive loss.   

I need to carry this NOL back 2 years and then forward? 

[BobKamman]

I see it now as an interesting statute of limitations question.  Is the 2017 year still open, because of the rejected 1040-X?   Did IRS wait until after May 17 to request the carrybacks?  Was an extension requested for the 2017 return, back in 2018?

[jlew1229]

I do not believe an extension was requested on the 2017 return.     The date on the paper copy is 4/3/2018.  If I had to guess it was filed before the April 15th 2018 deadline.   

An amended 2017 return was filed in May of 2020.     IRS states in their letter the amended return was received on May 19th 2020.  

This is the first letter our client has received regarding this.  It is dated May 19, 2021    But looking at the letter, the body of the letter keeps referring to not making an election to forego the 2017 net operating loss, but on the top of the letter it indicates tax period  Dec 31 2018.   So perhaps they are objecting to the 2018 return that was also amended by bringing this passive loss forward from the amended 2017 return.     The 2018 return was also amended back in May of 2020.    

The letter states they will allow 30 days from the date of this letter to file your claims to carry back the 2017 net operating loss.  After 30 days, the three year statute of limitations ( based on the loss year) will expire claims will not be allowed.      

[sjrcpa]

You are still confusing passive losses and NOL. If 2017 was the final year of the K-1 activity, there are no passive losses to carryover to 2018. Maybe you carried over an NOL which should have been carried back since no election was made to waive the carryback.

[jlew1229]

 Sorry- yes NOL   

 2017 was the final year of the K-1.   The original tax preparer did not make the election on the 2017 return to forego the carryback.    I was not aware the original tax preparer did not make the election 

Am I correct that I only need to carryback the NOL 2 years and then forward.     

[BobKamman]

Of course the original preparer would not have made the election to forego the NOL carryback, because of not even recognizing there was an NOL.  Trying to carry it forward was a mistake, once the 2017 problem was discovered.  

[jlew1229]

is it correct I only need to carry it back 2 years for 1 2017 NOL.  

[BobKamman]

Does the IRS letter suggest to which years it should be carried back?

Best place to start your research is with the Pub 536 for 2017.  It lists some exceptions to the two-year rule, which probably don't apply to your case.  You might also want to check the 2018 and 2019 editions because Congress keeps making retroactive changes to NOL rules.  

https://www.irs.gov/pub/irs-prior/p536--2017.pdf

[jlew1229]

Thank you 

I appreciate everyone's help.   I have carried back the NOL per the IRS letter.   2017 is the final year of the K-1 that produced the NOL, that I had to carry back   When I am amending 2017  I  removed  the prior year Passive losses on the 2017 K-1 input screen?  If I don't it seems like it is figuring this NOL, plus using the prior year NOL that was carried forward from having to carry it back.   Is my reasoning correct? 

[sjrcpa]

I don't think so.

"plus using the prior year NOL that was carried forward" 

Was there really a prior year NOL? Or are you mixing up passive losses and NOL again?

"I  removed  the prior year Passive losses on the 2017 K-1 input screen"

Aren't they what generated the 2017 NOL?

[jlew1229]

I am not explaining it well, my apologies.   Hopefully this explains it better.   

When I carry back the NOL that was generated in 2017 to 2015, it was not all used in 2015 or 2016, so the NOL that was left from carrying it back to 2015 and 2016 it is now carrying forward to 2017.  Per the 2016 general information, I have 30,054 of a NOL left to carry forward to 2017.  Now I go to the 2017 return to amend it   When I leave the prior year passive loss on the K-1 input screen of the 2017 amended return input, ( the original 2017 return generated this NOL) the NOL loss to carry forward to 2018 grows to $41,937.  If I take away the prior year passive loss on the amended 2017 K-1 input screen, and manually input the amount of the 2016 NOL to carryforward in screen 15, then the carryforward to 2018 is $25,830.   

Sorry, I have not carried back a NOL before and want to make sure I am doing it correctly.         

[sjrcpa]

You can't carry a 2017 NOL to 2017.

After carrying the 2017 NOL back to 2015 and 2016, any remaining NOL gets carried forward to 2018.

[jlew1229]

Thank you so much for all your help.  !!  I can't thank you enough.