My accountant never checked the box to waive the carryback of our old net operating loss, and now the Department has carried it back to earlier years and created tax due I didn't expect -- can that be undone?

Plain-English summary

A taxpayer wrote to the Department's legal department, upset that the Department's own audit or processing had carried back the company's net loss deduction (NLD) from two loss years to two earlier years, without the taxpayer's knowledge. That carryback wiped out refunds/credits the taxpayer had previously received for those earlier years and created new tax due (plus interest and fees) in later years -- money the taxpayer says they no longer have, partly because of the COVID-19 pandemic's effect on the business. The taxpayer's own CPA agreed this seemed unfair, and the taxpayer asked the Department to explain, and effectively reconsider, how this happened.

The core rule: carryback is the default, not carryforward. Under IITA Section 207(a), an Illinois net operating loss for a taxable year ending on or after December 31, 1999 and before December 31, 2003 is, by default, carried BACK to each of the 2 taxable years preceding the loss year, and then carried forward to each of the 20 following taxable years to the extent not absorbed. A taxpayer is not automatically entitled to skip the carryback and go straight to carrying the loss forward.

Carrying forward only requires an affirmative, timely election. IITA Section 207(a-5) lets a taxpayer relinquish the entire carryback period, but only by making an election "in the form and manner prescribed by the Department" and only by the due date (including extensions) for filing the return for the loss year itself. On the relevant 1999 and 2000 Form IL-1120-ST returns, that election was made by checking a specific box below Line 1a of Part II. Once made, the election is irrevocable -- and, just as importantly, if it is never made, the default carryback rule controls.

What happened here. The Department found that the company did not check that box on either its 1999 or 2000 Form IL-1120-ST to forgo the carryback period for its 1997 and 1998 Illinois net operating losses. The Department also checked whether either of the two narrow exceptions in 86 Ill. Adm. Code 100.2330(c)(3) applied -- where a finalized federal change or an Illinois audit change eliminates Illinois income and creates a late-discovered net loss, allowing a later election -- and found that neither applied based on what the taxpayer had provided. Because no timely election was ever made and no exception applied, the loss was required by law to be carried back under IITA Section 207(a-5)(B) and 86 Ill. Adm. Code 100.2330(d), and the resulting adjustments to the earlier years' tax liability (and the tax due that followed in subsequent years) were correct.

On the hardship point. The Department did not waive or reverse the carryback based on the taxpayer's financial hardship, but it did point the taxpayer toward Illinois's installment payment process -- Form CPP-1, or an online payment plan request through MyTax.Illinois.gov -- as a way to manage the resulting balance over time.

What this means for you

S corporations and other pass-through entities with old net operating losses

If you want to carry a net operating loss forward only (skipping the carryback), you must make that election by checking the designated box on the loss-year return itself, by the extended due date for that return. There is no general do-over: if the box isn't checked in time, the loss carries back automatically, even years later when the Department processes or audits the return.

If the Department has already carried back a loss you didn't expect

Check whether your original loss-year return (or your preparer's copy of it) actually had the carryback-relinquishment box checked and was filed by the extended due date. If it wasn't, the carryback described in this letter is the legally required outcome, not a discretionary Department decision -- there's no equitable exception for a missed election except the two narrow situations tied to a finalized federal change or an Illinois audit change under 86 Ill. Adm. Code 100.2330(c)(3).

If you can't pay a resulting balance due

The Department flagged Form CPP-1 (Installment Payment Plan Request) or the online payment plan option at MyTax.Illinois.gov as available options if you're facing a financial hardship, rather than treating the underlying carryback determination as something to be waived.

Accountants and tax professionals

Because this is a GIL and not a binding ruling, if a client is in an actual dispute over facts (for example, whether an election really was or wasn't made, or whether a federal/Illinois-audit exception applies), the taxpayer can pursue a binding Private Letter Ruling under 2 Ill. Adm. Code 1200.110(b), provided the taxpayer is not currently under audit.

Common questions

Q: If I have an Illinois net operating loss, can I just choose to carry it forward instead of back?
A: Only if you make a timely, affirmative election to relinquish the carryback period -- historically done by checking a specific box on the loss-year return (for example, below Line 1a, Part II of Form IL-1120-ST) by the extended due date for that return. If you don't make that election in time, the loss must be carried back.

Q: What happens if my preparer never checked the carryback-relinquishment box?
A: The default statutory rule applies: the loss is carried back to the two preceding taxable years before any remaining loss is carried forward, per IITA Section 207(a-5)(B) and 86 Ill. Adm. Code 100.2330(d).

Q: Are there any exceptions that let me make the election late?
A: Yes, two narrow ones under 86 Ill. Adm. Code 100.2330(c)(3): if a finalized federal change eliminates Illinois income and creates a new Illinois net loss, you may elect on an amended return within 120 days per IITA Section 506(b); or if an Illinois audit or other Illinois change eliminates Illinois income and creates the loss, you may elect on forms prescribed by the Department when the loss is first reported.

Q: Can the Department waive a carryback because paying the resulting tax would be a hardship?
A: Not based on this letter -- the Department instead pointed to installment payment options (Form CPP-1 or an online plan via MyTax.Illinois.gov) rather than treating the carryback itself as optional or reversible for hardship reasons.

Q: Is this letter a final, binding decision on my specific facts?
A: No -- it's a General Information Letter, which is not a statement of Department policy and is not binding on the Department. A taxpayer not under audit who wants a binding answer on their specific facts can request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110(b).

Citations and references

Statutes, regulations, and other authority:

• 35 ILCS 5/207(a) (loss carryback/carryforward periods for Illinois net operating losses)
• 35 ILCS 5/207(a-5) (election to relinquish carryback period; order of application of losses)
• 86 Ill. Adm. Code 100.2330(c) (procedure and deadline for the carryback-relinquishment election; narrow exceptions)
• 86 Ill. Adm. Code 100.2330(d) (portion of loss treated as carryback vs. carryover)
• 35 ILCS 5/506(b) (120-day election window after a finalized federal change)
• 86 Ill. Adm. Code 1200.120(b), (c) (GILs are non-binding general information)
• 2 Ill. Adm. Code 1200.110(b) (procedure to request a binding Private Letter Ruling)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2023/it23-0011-gil.pdf

Original ruling text

IT-23-00011-GIL 06/06/2023 NET INCOME (LOSS) AND NET LOSS
DEDUCTIONS
If no timely election was made under IITA Section 207(a-5) to carry a loss
forward only, that loss must be carried back. (This is a GIL.)
June 6, 2023
NAME/ADDRESS
Re:

Illinois Income Tax

Dear NAME:
This is in response to your letter dated January 18, 2021, in which you request
information regarding Illinois income tax. The nature of your request and the
information you have provided require that we respond with a General
Information Letter, which is designed to provide general information, is not a
statement of Department policy and is not binding on the Department. See 86 Ill.
Adm. Code 1200.120(b) and (c), which may be found on the Department's web
site at www.tax.illinois.gov.
Your letter states as follows:
I am writing to the legal department as recommended by the IDR agent I
have spoken with. I do not agree with what happened here. The IDR
carried back my NLD deduction from YEAR and YEAR to YEAR and
YEAR without my knowledge. I paid my tax of $$$ in YEAR and $$$ in
YEAR. I paid with 2 separate checks. Because they carried back the
deductions it caused my YEAR and subsequent years to have tax due. I
do not see how this can be fair and just. I also went over this with a CPA.
He agrees that this is unfair. I was not refunded the $$$ or the $$$ taxes
that were nullified from bringing the NLD back unbeknownst to me. I do
not have the funds to pay incorrect taxes from 20 years ago. The
pandemic has nearly put me out of business. The $$$+$$$ ( ) credited to
my account along with all the fees and interest. I could possibly settle with
that if I could have some time to pay it. Thank you for your time and
consideration.
RULING
Section 207 of the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/207) states in part:
(a) If after applying all of the (i) modifications provided for in
paragraph (2) of Section 203(b), paragraph (2) of Section 203(c) and
paragraph (2) of Section 203(d) and (ii) the allocation and apportionment
provisions of Article 3 of this Act and subsection (c) of this Section, the
taxpayer's net income results in a loss;

(1)…
(2) for any taxable year ending on or after December 31,
1999 and prior to December 31, 2003, such loss shall be allowed
as a carryback to each of the 2 taxable years preceding the taxable
year of such loss and shall be a net operating loss carryover to
each of the 20 taxable years following the taxable year of such loss;
(3)…
losses.

(a-5) Election to relinquish carryback and order of application of
(A) For losses incurred in tax years ending prior to
December 31, 2003, the taxpayer may elect to relinquish the entire
carryback period with respect to such loss. Such election shall be
made in the form and manner prescribed by the Department and
shall be made by the due date (including extensions of time) for
filing the taxpayer's return for the taxable year in which such loss is
incurred, and such election, once made, shall be irrevocable.
(B) The entire amount of such loss shall be carried to the
earliest taxable year to which such loss may be carried. The
amount of such loss which shall be carried to each of the other
taxable years shall be the excess, if any, of the amount of such loss
over the sum of the deductions for carryback or carryover of such
loss allowable for each of the prior taxable years to which such loss
may be carried.

Department Regulations Section 100.2330(c) states, in pertinent part, as follows:
1)

For losses incurred in tax years ending prior to December 31, 2003,
IITA Section 207(a-5)(A) allows the taxpayer to elect to relinquish
the entire carryback period with respect to the loss. The election is
made on the taxpayer's return for the taxable year in which the loss
is incurred. The election may be made only on or before the due
date (including extensions of time) for filing the return. If an
election is made, the loss is carried forward and deducted only in
years subsequent to the taxable year in which the loss was
incurred. The election, once made, is irrevocable. (IITA Section
207(a-5)(A))

…
3)

If the timely return for the taxable year reflects Illinois income and:
2

A)

a finalized federal change eliminates Illinois income thereby
creating an Illinois net loss for the year, the taxpayer may
make the election to relinquish the entire carryback period
for the Illinois net loss on an amended return or form
prescribed by the Department within the 120 day time period
prescribed by IITA Section 506(b); or

B)

an Illinois audit or other Illinois change eliminates Illinois
income thereby creating an Illinois net loss for the year, the
taxpayer may make the election to relinquish the entire
carryback period for the Illinois net loss on forms prescribed
by the Department at the time the loss is first reported to
Illinois.

Department Regulations Section 100.2330(d) states, in pertinent part, as follows:
Portion of Illinois Net Loss That Is a Carryback or a Carryover to the
Taxable Year in Issue. Pursuant to IITA Section 207(a-5)(B), the entire
amount of a loss is carried to the earliest taxable year to which the loss
may be carried. The amount of the loss, which is carried to each of the
other taxable years, is the excess, if any, of the amount of the loss over
the sum of the deductions for carryback or carryover of the loss allowable
for each of the prior taxable years to which the loss may be carried.
On the 1999 and 2000 Form IL-1120-ST, the election to forego the carryback
period for an Illinois net loss is made by checking the box below line 1a of Part II
of the return. The General Instructions to the 1999 Form IL-1120-ST, at page 3,
explain how to make the election and when it must be made.
Note: You may make the election to forgo the Illinois NLD carryback
period by checking the box below Part II, Line 1a. This election must be
made by the extended due date of the loss year return. Once made, the
election is irrevocable. (Emphasis in original)
The same information is repeated in the instructions to Part II, Line 1a:
Line 1a — Follow the instructions on the form. If this amount is a loss, you
may carry it to other years as an Illinois net loss deduction (NLD). If you
are electing to forgo the Illinois NLD carryback period, you must check the
box below Line 1a. This election must be made by the extended due date
of this return. Once made, the election is irrevocable. (See General
Information, “What if I have an Illinois net loss deduction (NLD)?”)
(Emphasis in original)
Likewise, the General Instructions to the 2000 Form IL-1120-ST, at page 2, also
explains how to make the election and when it must be made.
3

Note: You may make the election to forgo the Illinois NLD carryback
period by checking the box below Part II, Line 1a. This election must be
made by the extended due date of the loss year return. Once made, the
election is irrevocable. (Emphasis in original)
The same information is, once again, repeated in the instructions to Part II, Line
1a:
Line 1a — Follow the instructions on the form. If this amount is a loss, you
may carry it to other years as an Illinois net loss deduction (NLD). If you
are electing to forgo the Illinois NLD carryback period, you must check the
box below Line 1a. This election must be made by the extended due
date of this return. Once made, the election is irrevocable. (See
General Information, “What if I have an Illinois net loss deduction (NLD)?”)
(Emphasis in original)
In this case, COMPANY did not elect by the extended due date of its 1999 or
2000 IL-Form-1120-ST to forego the carryback period for its 1997 and 1998
Illinois net operating losses by checking the box below Line 1a, Part II. In
addition, based on what you have provided, neither circumstance specified in
Department Regulations Section 100.2330(c)(3) appear to apply. Therefore, the
loss was required to be carried as provided in IITA Section 207(a-5)(B) and
Department Regulations Section 100.2330(d).
If you believe that you cannot pay your tax delinquencies in full because of a
financial hardship and you would like to enter into an installment plan, you may
file a Form CPP-1, Installment Payment Plan Request, or request a payment
plan online using MyTax.Illinois.gov. I have attached a copy of the Form CPP-1
for your convenience. Additional copies may be found on the Department’s
website www.tax.illinois.gov.
As stated above, this is a general information letter which does not constitute a
statement of policy that applies, interprets or prescribes the tax laws, and it is not
binding on the Department. If you are not under audit and you wish to obtain a
binding Private Letter Ruling regarding your factual situation, please submit all of
the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions regarding this letter, you may contact me at (217) 7822844.
Sincerely,
Michael D. Mankowski
Associate Counsel (Income Tax)
cc:
Daily File
Correspondence file:
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