Audited But Need to File? Here’s What You Need to Know About Net Operating Losses and More
Let’s set the scene: your taxes are due, you’re ready to file, but there’s one little hiccup—your return from last year is under audit. So, what’s the deal? Can you go ahead and file this year’s return, or do you need to wait until the IRS wraps up their audit?
Here’s the good news: Yes, you can still file your taxes, even if the IRS is currently auditing your previous year’s return. There’s no hard and fast rule that says you can’t. But, before you rush to file, there’s something important to consider—it might not always be the best idea to submit that return right away. The outcome of that audit could impact what you owe (or what you’re owed) for the current year, and that’s something you don’t want to ignore.
Why Wait?
It’s a bit like baking a cake. Let’s say you’ve got a couple of ingredients that are a little questionable. You’re thinking, “Should I start mixing everything up now, or should I wait to see if those eggs are still good?” In tax terms, the eggs are the audit of your prior year’s return, and if the IRS makes adjustments to last year’s numbers, it could throw off what you owe this year. Filing early is like starting that cake before you’ve double-checked your ingredients—you might end up with a mess on your hands.
Of course, just because you can file doesn’t mean you should rush into it. Sometimes it’s worth waiting to see how that audit shakes out. But, if you’re pressed for time or need to file, you can absolutely move forward. Just know that if the IRS changes something significant from the previous year, you might need to go back and amend your current return down the road.
How an Audit Can Impact Your Current Return
So, what kinds of things from last year’s audit might throw a wrench in this year’s return? There are a few key areas where adjustments from the IRS could spill over and affect what you’re dealing with now. Here are a few common scenarios:
- Capital losses: Maybe you sold some stock or cryptocurrency last year, and the IRS decides to adjust your sales price or purchase price during the audit. This could change how much of a capital loss you’re allowed to carry over to this year.
- Dependent claims: Let’s say you claimed someone as a dependent, but the audit reveals they didn’t actually qualify. This could affect various credits like the Child Tax Credit, Earned Income Tax Credit, or the Child and Dependent Care Credit for both last year and this year.
- Depreciation: If you’re claiming depreciation on assets, rental property, or real estate, any adjustments from the IRS could change your numbers for this year’s deductions.
- Disallowed expenses: If the IRS disallows certain expenses—like meals or travel costs you thought were deductible last year—that could mess with your plans to deduct similar expenses this year.
- Filing status: Sometimes, audits catch filing status issues. For instance, maybe you filed as “Single” when you were actually married. This could have a ripple effect on your current return if it changes how you should have filed last year.
- Net operating losses: If you’re claiming a net operating loss (NOL) from a previous year, the IRS might disallow or change that loss, which would affect your carryover for this year’s taxes.
Are any of these sounding familiar? If so, it might be worth pausing to see how the audit plays out before you submit this year’s taxes. But if you’re in a rush to get things done, go ahead—just be prepared for the possibility of having to fix things later.
Let’s Meet Sarah and Her Stocks
So, Sarah’s really into stocks. In 2023, she sold a bunch of stocks that didn’t do so hot. She had a loss of $15,000. Now, there’s a rule that says she can only deduct $3,000 of that loss in 2023, but the rest—$12,000—can be carried over to 2024 to help lower her taxes then. Sounds pretty good, right?
But here’s where things get a little tricky. The IRS takes a closer look at her 2023 return and says, “Wait a minute, we’re not allowing all of that $15,000 loss.” Maybe she didn’t have the right paperwork, or something was miscalculated. In the end, the IRS says she only had a $7,000 loss, not $15,000.
What Happens Next?
Now, fast-forward to 2024. Sarah sells more stocks and makes a $20,000 profit. She’s excited because she thinks she can use that $12,000 leftover loss from 2023 to knock down her taxable profit, which means she’ll owe less in taxes.
But here’s the catch: since the IRS reduced her 2023 loss to $7,000, that means she only has $4,000 left to carry over to 2024 (because remember, she already used $3,000 in 2023). So instead of reducing her $20,000 profit by $12,000, she can only reduce it by $4,000. Now she’s left with $16,000 in taxable profit—not the $8,000 she thought she’d have.
The Bottom Line
Sarah’s definitely not happy at this point. She’s going to owe more in taxes for 2024 than she expected, and she might even have to go back and fix her 2024 return. Plus, there could be penalties and interest for underpaying her taxes based on the wrong amount.
So, what’s the moral here? If the IRS disallows part of your capital loss, it doesn’t just affect that year—it can come back to haunt you in future years, too. Isn’t it frustrating how these things have a domino effect?
This is one of those times where double-checking everything before you file is key. It can save you a headache (and some extra taxes) later on!
Meet Carla and Her Business Ventures
Carla runs a small consulting business. In 2022, things didn’t go so well—her business expenses were much higher than her income, leading her to claim a Net Operating Loss (NOL) of $50,000 on her 2022 tax return. Under normal circumstances, this NOL would be carried forward into future years, potentially reducing her taxable income in 2023 and beyond.
So, fast forward to 2023. Carla’s business picks up, and she makes a profit of $40,000. She’s expecting that $50,000 NOL from 2022 to offset her 2023 income completely, and maybe even give her some extra NOL to carry forward to 2024. Sounds great, right?
But here’s the snag. In 2024, the IRS audits her 2022 tax return and decides that some of Carla’s expenses weren’t fully deductible. Maybe they decide her home office deduction was too high, or they disallow a portion of her travel expenses. As a result, the IRS reduces her NOL from $50,000 to $20,000.
Now, this changes everything for her 2023 return. Carla had filed her 2023 return assuming the full $50,000 NOL would wipe out her $40,000 profit, so she didn’t expect to owe any taxes. But with the IRS reducing the NOL to $20,000, Carla is now left with a taxable income of $20,000 ($40,000 profit – $20,000 NOL). This means she owes taxes for 2023 after all, plus possible penalties and interest for underpaying.
Impact on Future Years
Not only does this affect Carla’s 2023 return, but it also changes her plans for future years. Instead of having another $10,000 NOL to carry forward to 2024, she has nothing left. So any profits she makes in 2024 and beyond will be fully taxable.
This example shows how a disallowed NOL can have a ripple effect, changing your tax situation in future years and potentially leading to back taxes, penalties, or amended returns. It’s always important to be cautious when calculating NOLs, and it’s a good idea to wait for any audits to wrap up before relying on those losses to offset future income!
When You Can’t Wait to File
Okay, so what if you can’t wait to file? Life happens, and sometimes waiting around for the IRS to finish an audit isn’t realistic. Maybe your child needs your tax return info for a college financial aid application, or you’re trying to qualify for a mortgage and the lender needs your latest return. In these cases, go ahead and file your current year’s return. Just be aware that if the audit results in any changes, you’ll likely need to go back and amend your current year’s return later on.
Filing now isn’t the end of the world. Yes, it’s possible that you’ll need to make some adjustments down the road, but it’s also possible that everything could go smoothly. And hey, if there’s a deadline breathing down your neck, sometimes it’s better to file now and deal with the consequences later. Just be sure you’re prepared to follow up if necessary.
The Bottom Line
So, what’s the takeaway? If the IRS is auditing your previous year’s return, you can still file your current year’s taxes. There’s no rule against it. But, depending on the outcome of the audit, you might have to go back and adjust your return later on. The key is to know what’s being audited and how it might affect your current numbers.
Think of it like waiting for the full picture before making a decision. Would you bake a cake without checking the recipe? Probably not, right? Filing taxes is the same—if you have time to wait for the audit, it might save you some headaches down the road. But if you can’t wait, go ahead and file, just keep an eye on what might need changing later. It’s all about staying informed and prepared.
And hey, wouldn’t it be nice if the IRS could hurry up a bit?