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Business Tax Refunds Must Be Provided Quickly During Future Downturns

2 min readBy: Garrett Watson

During the pandemic, policymakers relied on the Internal Revenue Service (IRS) to administer business relief through the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code. The emergency relief, including business tax refunds for net operating losses (NOLs), was intended to quickly help businesses that lost their source of income during the pandemic. A new report from the Government Accountability Office (GAO) finds many businesses have yet to receive tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s they are due. Future business tax relief must be provided in a timely manner during the next downturn, because delayed tax relief is not much better than no relief at all.

As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, policymakers allowed firms to take NOLs already on the books and apply them to taxes paid in prior years. In other words, businesses could amend their prior year tax returns and receive a check from the IRS for the taxes they had paid. It’s a policy known as an NOL carryback, designed to ensure the tax system does not penalize firms for having a volatile cash flow as can happen with changing economic conditions. It was also intended to provide cash to businesses struggling to survive the pandemic.

An important part of the administrative process should have been to ensure the amended tax returns and tax refunds were processed quickly so the relief would be effective. The IRS is statutorily required to process refunds within 90 days. The GAO report, however, found the average processing time was 166 days for business filers as of November 2021.

When businesses amend their return, they often must file it as a paper return. The ongoing backlog of paper returns at the IRS, due to pandemic-related reductions in on-site activity, contributed to the business refund processing delays. The backlog in applications for NOL carrybacks was not tackled until April 2021, about a year after the CARES Act was passed, though months later in November 2021 about 460 business filers from 2020 still had not been entered into processing.

To improve the timeliness of future business tax refunds, the GAO recommended that the “IRS establish mitigation plans—including indicators, such as a threshold to initiate mitigation activities—to timely address future challenges to processing times for applications for tentative refunds…within the 90-day statutory requirement.” These mitigation options included weekly carryback reports for staff and inventory projections to identify and project the number of future filings.

In addition to better processing by the IRS, policymakers should consider finding ways to simplify the administration of relief during future crises. A simpler process will help ensure the relief is timely and targeted, key components of any successful relief package for the current crisis or crises in the future.