Wealthy business-owning clients need to be careful when using a common tax-saving tactic, even while punishments for misuse remain rare.
A carryforward, or carryover, credit or deduction claims an unused portion of a tax credit or deduction on a future year's tax return. The Treasury Inspector General for Tax Administration (TIGTA) found that some 2.5 million returns in a recent year contained a total of $81.9 billion in claims for carryforward credits and 6.5 million returns claimed carryforward deductions of $55.9 billion.
Most high-net-worth, business-owning clients understand and use carryforwards properly, according to Chad Jaffee, vice president at KORE Private Wealth in New York. “Any time we discuss a sale of an asset we want to be mindful of available loss carryforwards as an opportunity to mitigate the tax impact of a sale,” he said.
Nevertheless, in a review of 2015 e-filed returns, TIGTA discovered 19,193 taxpayers claiming a carryforward credit or deduction with more than $5 billion in discrepancies.
“I haven’t seen any way to intentionally abuse these carryforward credits or deductions,” said Bill Campion, CPA and president of W.A. Campion Co. in Golden Valley, Minn. “Our clients generally don’t understand much of the tax law, but we do our best to explain it in layman’s terms.”
But advisors said the deduction can create some confusion.
“I’ve personally witnessed returns where the credit/deduction carryforward is there in 2016, disappears in 2017—because the preparer forgot it, missed it or the client changed preparers—and then it reappears in 2018,” said Bruce Primeau, CPA/CFP, president at Summit Wealth Advocates in Prior Lake, Minn.
Mark B. Zinman, a CPA at Zinman & Company in Southampton, Pa., noted that the IRS provides no guidance for making sure the correct numbers are carried forward to the subsequent year’s return.
“There is abuse, and it comes in two forms,” Zinman added. “First are obviously bad actors who think they know what the IRS does and doesn’t look for, and [think that] by putting down a carryforward ... they can obtain a tax benefit they otherwise aren’t entitled to. Second, there are those who either prepare their own return or jump from preparer to preparer and the numbers get estimated or guessed.”
Adding to the confusion is that there are varying carryover periods, said Brian Stoner, a CPA in Burbank, Calif. “Net operating losses can carry forward 20 years, and tax credits have varying carryforward periods,” he said.
Gail Rosen, a CPA in Martinsville, N.J., has found the opposite of carryforward abuse. “Due to the increased standard deduction with the new tax law, a few of our clients decided to try to do their own return for 2018,” she said. “We had the opportunity to check those self-prepared tax returns when two clients returned for other services. In both situations, the clients missed carryforward credits from a prior year and we had to amend their return.”