Corporate Taxes:

Many Benefits and Few Costs to Reporting Net Operating Loss Carryover

GGD-93-131: Published: Sep 23, 1993. Publicly Released: Oct 25, 1993.

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Pursuant to a congressional request, GAO provided information on corporate net operating losses (NOL), focusing on: (1) corporate NOL carryovers from past years; (2) Internal Revenue Service (IRS) taxpayer instructions on how to use NOL carryovers; (3) an IRS proposal to modify corporate tax returns to include the reporting of NOL carryover amounts; and (4) IRS enforcement efforts on NOL and net operating loss deduction (NOLD) reporting by corporations.

GAO found that: (1) small and large corporations reported at least $245.7 billion in NOL carryovers by 1989 and most of the corporations erroneously reported NOL carryover as NOLD; (2) the wholesale and retail trade, construction, and manufacturing industries have the lowest percentage of NOL carryover and the mining, finance, insurance, real estate, agriculture, forestry, and fishing industries have the highest NOL carryover; (3) foreign and domestic corporations have similar percentages of NOL carryover to total receipts; (4) corporations erroneously report NOL carryover as NOLD because reporting instructions are not clear; (5) IRS plans to clarify 1993 NOLD instructions; (6) IRS has proposed that corporations report their NOL carryover on a separate line on their tax returns; (7) new NOL data would improve revenue estimates on proposed changes to corporate tax law, voluntary compliance among corporations, and IRS checks for NOLD compliance; (8) IRS generally audits a small percentage of corporate returns that report NOL because it believes they have little revenue potential; and (9) IRS audits of small companies reporting NOL in 1987 could have generated $2 billion in additional tax revenue.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS revised its tax instructions for tax year 1993.

    Recommendation: The Commissioner of Internal Revenue should revise IRS instructions on reporting NOLD to clarify amounts that can be deducted and to clearly define NOL carryover.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS revised the tax return for 1993 to collect this information.

    Recommendation: The Commissioner of Internal Revenue should require corporations to annually report their NOL carryovers and use the reported amounts to track corporate NOLD claims.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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