Net Operating Loss Disallowed? The Section 172 Tax Court Guide

Your notice of deficiency disallowed your net operating loss carryforward, and the IRS wants tax for a year you thought the loss covered. The petition deadline is 90 days from the date on the notice (150 days if it was addressed to you outside the United States), and it cannot be extended.

A net operating loss (NOL) is what is left when a year's business-type deductions exceed that year's income. IRC Section 172 lets you use it in other years, but only on the law's terms. In an NOL dispute, the United States Tax Court works through three questions:

1. Did the loss exist, and how big was it? You prove this with records from the loss year, not with the return that reported it.
2. Where did the loss have to go first? Every earlier year the law sent it to, whether or not you claimed it there.
3. What is left for the year in your notice? The arithmetic that carries the loss from its origin to your year.

The burden of answering all three is yours. In the NOL opinions we reviewed, most taxpayers lost on proof, not law, including accountants and lawyers who represented themselves. Around 89% of Tax Court petitioners represent themselves.

Where To Start, Depending on Where You Are

• You need to know how the loss moves between years. Start with Where the Loss Can Go: Three Regimes and The Absorption Trap.
• You want to know why the IRS disallowed it. Go to Why the IRS Disallowed Yours.
• You are gathering proof. Go to What the Tax Court Requires You To Prove and the Documents Checklist.
• You think the IRS's numbers are wrong. Go to How To Check the IRS's Numbers.
• The IRS also disallowed the loss that created the NOL. That fight comes first: see our guides to rental and passive losses, hobby losses, business expenses and bad debts.

What a Net Operating Loss Is

Section 172(c) defines an NOL as the excess of your allowable deductions over your gross income, figured with the adjustments in § 172(d). Those adjustments are why your NOL is often smaller than the loss your return appears to show. You cannot fold an earlier NOL into a new one, capital losses count only up to capital gains, and there is no personal exemption or qualified business income (§ 199A) deduction.

Most important for individuals: personal deductions cannot create an NOL. Under § 172(d)(4), nonbusiness deductions are allowed "only to the extent of the amount of the gross income not derived from such trade or business". In plain English, your standard deduction and personal itemized deductions can offset nonbusiness income, but they cannot push you into an NOL. The Instructions for Form 172 list the usual sources: a trade or business, casualty and theft losses from a federally declared disaster, and rental property. The statute reaches further than that list: under § 172(d)(4)(C), a theft loss from a transaction entered into for profit (an investment scam or a Ponzi scheme, for example) also counts, with or without a disaster. Our scam and theft loss guide covers when that deduction is allowed.

For example, suppose your business lost $50,000, you earned $10,000 of interest, and you took a $15,000 standard deduction. Your adjusted gross income minus the standard deduction is minus $55,000 (the starting figure on Form 172, line 1), but your NOL is $50,000, because the standard deduction can offset only the $10,000 of nonbusiness income.

Partnership and S corporation losses reach your NOL only after they clear the limits that come first: your basis, roughly your tax investment in the business (§ 704(d) for partners, § 1366(d) for S corporation shareholders); the at-risk rules of § 465, which generally cap your loss at what you actually stand to lose; and the passive-activity rules of § 469, which generally let losses from rentals and from businesses you do not materially participate in offset only passive income.

Joint returns. If you filed jointly with the same spouse in every year involved, the NOL and its carryovers are figured on your joint losses and combined taxable income (Treas. Reg. § 1.172-7). If you were not married to each other in all of those years, the Form 172 instructions say "only the spouse who had the loss can take the NOL deduction." If you were married to each other in every year involved but filed separate returns in any of them, special rules apply (see Change in Filing Status in the Form 172 instructions). A joint return also makes each spouse liable for the whole tax; if the disallowed loss was your spouse's, see Innocent Spouse Relief in Tax Court.

The form. Form 172 figures the NOL (Part I) and the carryover (Part II). Older guidance points to Publication 536, but the IRS has retired it: "Publication 536 will no longer be revised after tax year 2023. Instead, information for net operating losses is now included in the Instructions for Form 172."

Not every loss carryforward is an NOL. Capital losses carry over on Schedule D under § 1212(b) (if the loss itself is disputed because of basis, see Cost Basis: How To Fight a 1099-B or Crypto Gain in Tax Court), suspended passive losses on Form 8582 (How To Deduct Rental and Passive-Activity Losses), unused home office expenses on Form 8829 (Home-Office Deduction Denied?), and disallowed investment interest on Form 4952 (Mortgage Interest Denied?). A negative qualified business income amount also carries forward under § 199A (QBI Deduction). Each follows its own rules. If the carryforward in your notice is one of these, start with that guide.

Where the Loss Can Go: Three Regimes

An NOL is figured under the law of the year it arose in, and each other year in the chain under that year's law (§ 172(e)). As the Supreme Court put it in Reo Motors, Inc. v. Commissioner, 338 U.S. 442 (1950): "We think that a net operating loss must be computed on the basis of the tax laws applicable to the year in which the loss was suffered."

Congress changed the rules in late 2017 and again in the 2020 CARES Act, so the year of your loss puts it in one of three regimes, shown below for a calendar tax year. Each sets a carryback period (the earlier years the loss goes to first) and a carryforward period (the later years it can still reach):

The 20-year carryforward is in § 172(b)(1)(A)(ii)(I). The old two-year carryback is no longer in the statute's text, but Wagner v. Commissioner, T.C. Memo. 2015-120 summarized it: "In general, net operating losses are carried back two years and forward 20 years." Davison v. Commissioner, T.C. Memo. 2023-139 describes the longer farming and 2008-2009 periods. For a pre-2018 loss, check the Publication 536 edition for your loss year, which the IRS keeps online.

The five-year carryback for 2018 to 2020 losses is in § 172(b)(1)(D). For later losses, the Form 172 instructions are blunt: "If you have an NOL for a tax year ending after 2020, only the farming loss portion, if any, can be carried back." A farming loss is the part of the NOL that comes from farming businesses (the instructions give the exact test).

Why this matters in a 2026 notice. If your carryforward came from a loss in 2020 or earlier, or from the farming portion of a later loss, and you never waived the carryback, the law sent the loss backward first. Whatever those earlier years absorbed is gone, and you must prove what was left. In the opinions we reviewed, it was one of the two most common reasons taxpayers lost.

The 80% Limit

For tax years beginning after 2020, § 172(a)(2) lets you deduct pre-2018 NOLs first and in full. NOLs from 2018 on can then offset only 80% of the taxable income that remains (figured before the NOL and qualified business income deductions); the unused part carries forward. As the Form 172 instructions put it: "Only NOLs arising after 2017 and carried forward to a year after 2020 are subject to the 80%-of-taxable-income limit."

So the loss year's law decides whether an NOL exists and where it goes, while the law of the year you deduct it decides how much you can use. That is why a 2019 loss used in 2023 is still capped at 80%.

The Waiver Election

For a loss from 2020 or earlier, the carryback was mandatory unless you waived it under § 172(b)(3). The waiver had to be made by the loss-year return's due date, including extensions, with a statement attached to that return (Treas. Reg. § 301.9100-12T(d)). The choice is final. Section 172(b)(3) says: "Such election, once made for any taxable year, shall be irrevocable for such taxable year." A farming loss from a later year works the same way: it goes back two years unless you elect out by the same deadline, and that election is also irrevocable (§ 172(b)(1)(B)(iv)).

If you filed on time but left the statement off, Treas. Reg. § 301.9100-2(b) allows six months from the original due date (not counting extensions) to add it on an amended return. The Form 172 instructions warn: "If you do not file this statement on time, you cannot waive the carryback period." (For 2018 and 2019 losses, the CARES Act moved the deadline in § 172(b)(1)(D)(v)(II); for calendar-year filers, it became the due date of the 2020 return, with extensions.)

The statement itself can be short. The Form 172 instructions say it "must show that you are choosing to waive the carryback period under section 172(b)." To prove you filed it, you need the loss-year return as filed, with its attachments, from your own files, your preparer's file, your tax-software account, or an IRS copy of the return.

What the cases show:

• A software screenshot is not an election. In Patacsil v. Commissioner, T.C. Memo. 2023-8, that was the only evidence of a waiver. The Court: "Taxpayers can elect to forgo a carryback, but without a timely election they must carry NOLs back before they can carry them forward."
• An unreported loss carries no waiver. In Mosley v. Commissioner, T.C. Memo. 2025-7, the 2009 return never reported the claimed loss, so no election was made.
• No waiver means proving the carryback years. In Greenblatt v. Commissioner, T.C. Memo. 2024-109, an S corporation case with no waivers, the Court explained that "petitioners must establish that any NOL otherwise substantiated would not be absorbed in the carryback period."
• A valid waiver takes those years out of the case. In Duffy v. Commissioner, T.C. Memo. 2020-108, the 2014 return included the election, so the 2014 loss had no bearing on the couple's 2012 or 2013 tax.

The Absorption Trap: Earliest Year First, Claimed or Not

Section 172(b)(2) sends the loss first to "the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried". Only what that year's taxable income did not absorb moves on to the next year. With more than one NOL, the Form 172 instructions say to apply them "in the same order in which you incurred them, starting with the earliest."

The income that absorbs the loss is a modified figure: no personal exemption, no § 199A deduction, none of this NOL or later ones, never below zero, and, after 2020, reduced to match the 80% cap. Form 172, Part II, walks you through it.

Absorption happens whether or not you claimed the loss. In Fussell v. Commissioner, T.C. Memo. 2025-131, where the taxpayer represented himself and the claimed loss came from unpaid loans, the Court held that even a proved loss would have been used up before the year at issue: "Even if the NOL had arisen in 2015, petitioner's reporting with respect to 2015 and 2017 indicates that none of the NOL would have remained to be carried to 2018." It did not matter that he had not claimed the full amount in the earlier years.

A Worked Example

Here is how one audit adjustment can raise tax in a later year whose return did not change. The numbers are illustrative, not from a case, and assume no pre-2018 NOLs, no § 199A deduction, and no other modifications. A 2022 business loss creates a $60,000 NOL. It is not a farming loss, so it goes forward to 2023 first.

As filed:

After the IRS disallows $20,000 of 2023 business expenses:

The $20,000 adjustment raises 2023 taxable income by only $4,000, because more of the NOL is absorbed there. It raises 2024 taxable income by $16,000, although nothing on the 2024 return changed. A notice of deficiency for 2024 can rest entirely on what the IRS did to 2023, even if 2023 itself is closed to assessment.

A real case. In Mirch v. Commissioner, T.C. Memo. 2025-128, two attorneys representing themselves carried a 2007 NOL back to 2005 and 2006. The IRS cut the loss from $416,151 to $335,081, partly by treating their rental losses as passive, and its audit raised their 2005 income. The result, in the Court's words (in a Tax Court case, the IRS is the "respondent"): "Respondent determined that petitioners' 2005 taxable income (as adjusted during the audit) completely absorbed the 2007 NOL, and none remained for petitioners to carry back to 2006." The Court agreed.

Excess Business Losses: How a Big Loss Becomes Next Year's NOL

If your business losses were large, IRC Section 461(l) may have turned part of them into an NOL first. For tax years beginning after 2020, it caps the business losses you can deduct in the current year at your business income plus an inflation-indexed threshold, and it applies after the at-risk and passive-activity limits. (The 2020 CARES Act took 2018 through 2020 out of the rule, so § 461(l) did not limit a loss from those years.) The disallowed excess "shall be treated as a net operating loss for the taxable year for purposes of determining any net operating loss carryover under section 172(b) for subsequent taxable years", and like any post-2017 NOL it is subject to the 80% limit when used.

Wages do not count as business income here. The excess is figured "without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee" (§ 461(l)(3)(A)). So a large salary cannot absorb a large business loss under this rule.

The threshold for each year, with the joint-return figure in parentheses:

• The threshold dropped for 2026. The One Big Beautiful Bill Act (Pub. L. 119-21, July 2025) reset the inflation base year, which is why the 2026 figure is lower than 2025's.
• The rule is now permanent. The same law removed § 461(l)'s end date for tax years beginning after 2026. (Cornell's main text still shows an old end date; the amendment notes on the same page explain why.)
• The 2025 law did not change the NOL rules for individuals. Its only change to § 172 was a heading.

On Schedule 1 (Form 1040), the NOL deduction goes on line 8a and the excess business loss adjustment on line 8p.

We found no Tax Court opinion deciding an excess business loss dispute or applying the 80% limit in a contested case. Based on the statute alone, § 461(l) can reach a notice in two ways: the IRS applies a limit your return ignored, raising this year's tax and moving the excess into next year's NOL, or it recomputes a carryover that included an earlier year's excess business loss.

Why the IRS Disallowed Yours

The Tax Court's NOL opinions fall into a handful of patterns. Find yours; it tells you what you have to prove. In the opinions we reviewed, the first two were the most common.

Start with the papers attached to your notice, such as an examination report (Form 4549) and an explanation of items (Form 886-A); that is where the IRS explains the NOL adjustment. If the explanation says only that the loss was not established, assume the IRS disputes every link in the chain described below, and after you file, ask the IRS attorney which links it actually contests.

1. No proof the loss ever existed. The loss-year records are gone, and the only evidence is the return. Professionals lose this one too: in Kerstetter v. Commissioner, T.C. Memo. 2012-239, a self-represented couple (he ran an accounting and tax-preparation business) "claimed to have boxes of documents substantiating the net operating loss carryovers" but never produced them. A variant: in Filler v. Commissioner, T.C. Memo. 2021-6, a reported $4,099,147 NOL failed because no closed and completed transaction (an event, such as a sale, that makes a loss final) fixed a loss in the year claimed.
2. The loss existed but was used up earlier (Mirch, Fussell, Greenblatt).
3. No valid waiver, so the carryback years come into play (Patacsil, Mosley, Greenblatt).
4. The loss was blocked before it reached § 172. In Bryan v. Commissioner, T.C. Memo. 2023-74, a carryover from a partnership loss failed for lack of basis and amount at risk.
5. The IRS changed the loss year itself. In Duffy, adjustments eliminated the reported 2011 NOL, so its carrybacks to 2009 and 2010 fell too.
6. Inconsistent numbers across returns. In Shaut v. Commissioner, T.C. Memo. 2024-103, a lawyer representing himself reported different carryforward amounts on different returns, which the Court said "further undermine his credibility".
7. No NOL statement with the return. Treas. Reg. § 1.172-1(c) requires a statement with the return claiming the deduction, including "a detailed schedule showing the computation of the net operating loss deduction". In Risan v. Commissioner, T.C. Memo. 2026-78 (September 2026; the taxpayer had counsel), no statement was attached to any year's return, and the Court said that alone was enough to disallow NOLs of $3.5 million to $16.2 million a year. McRae v. Commissioner, T.C. Memo. 2019-163, involving a couple representing themselves, had the same gap. For future returns, the Form 172 instructions say to attach a Form 172 for each NOL to the return on which you deduct it.
8. Years with no return. The NOL was claimed for the year at issue only after the IRS prepared a substitute for return, its own version of a return you did not file (Fussell, Mosley); see The IRS Filed Your Return? Why It's Too High.

What the Tax Court Requires You To Prove

The Burden Is Yours

Deductions, loss carryovers included, depend "upon legislative grace" (New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934), itself a carryover case), and the IRS's determination has "the support of a presumption of correctness" (Welch v. Helvering, 290 U.S. 111 (1933)). In plain English, you get a deduction only if the law clearly provides one, and the IRS's numbers stand until you prove them wrong; Tax Court Rule 142(a) puts that burden on you.

For NOLs, the Court's reported opinion in Keith v. Commissioner, 115 T.C. 605 (2000) says "the taxpayer bears the burden of establishing both the actual existence of net operating losses in the prior years and the amount of such losses that may be carried to the years at issue."

The burden-shifting statute, IRC Section 7491(a), rarely helps, because it first requires credible evidence and substantiation. In Aulisio v. Commissioner, T.C. Memo. 2024-29, a CPA representing himself had instead "provided contradictory testimony and exhibits as to the origin and nature of the alleged loss." See Burden of Proof in Tax Court.

You Have To Prove the Whole Chain

Proving the loss is only the start. In Villanueva v. Commissioner, T.C. Memo. 2022-27, the Court explained: "As part of this proof, the taxpayer must establish that the NOL was not fully absorbed in the years preceding the particular year for which he seeks the NOL deduction." Mr. Villanueva conceded that his claimed loss arose in a 2009 foreclosure and could not show that any of it survived to 2013.

In Chaganti v. Commissioner, T.C. Memo. 2016-222, an attorney representing himself had not waived the carryback on his 2003 loss, so it had to go back to 2001 and 2002 first. He offered no evidence about his tax for those years, and "Because of that failure of proof, he has no NOL to carry forward."

The chain has five links:

1. The loss year and the amount of the loss, proved with records.
2. The loss survived the earlier limits: basis, at-risk, passive, and § 461(l).
3. A timely waiver, or proof of each carryback year's taxable income.
4. Each intervening year's taxable income as finally determined, including audit changes.
5. The arithmetic that leaves the claimed amount for your year, after the 80% limit where it applies.

A Return Is Not Proof of the Loss

The Court restated the rule as recently as August 2026, in Chapin v. Commissioner, T.C. Memo. 2026-76 (the taxpayers had counsel): "Tax returns are merely statements of a taxpayer's position and cannot be used to substantiate a claimed deduction, including the amount of the NOL to be carried forward." The reported case Gould v. Commissioner, 139 T.C. 418 (2012) applied the same rule to a capital loss carryover. Returns still matter, because they show the intervening years' income and the waiver statement. But the loss year needs the records behind it.

No Estimates

When records are incomplete but an expense clearly happened, the Tax Court can sometimes estimate it under the rule from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). Do not count on that for an NOL. Aulisio: "The Cohan rule is inappropriate here because petitioner has failed to adduce evidence substantiating the origin, nature, and calculation of the NOL." In Anderson v. Commissioner, T.C. Memo. 2024-95, with ledgers but no source documents, the Court had no "basis to estimate those amounts."

IRS Processing Is Not Agreement

A refund, a processed amended return, or a no-change letter (the letter closing an audit with no changes) is not the IRS accepting your loss. In Fussell, despite a processed amended return and a CP21B refund notice for an earlier year, the Court said: "The IRS is not bound to allow any tax benefit simply because it was permitted for a prior year." In Gould, a no-change letter did not bind the IRS either. And the Form 1045 instructions say a fast carryback refund "doesn't mean the IRS has accepted your application as correct."

Old and Closed Years Get Recomputed

A loss year past the statute of limitations is not locked in. IRC Section 6214(b) lets the Court consider other years' facts as needed to redetermine your deficiency, and Filler explained that this includes determining "the correct amount of taxable income or an NOL for a year not in issue as a preliminary step in determining the correct NOL carryover to a year before us." The reported case Ron Lykins, Inc. v. Commissioner, 133 T.C. 87 (2009) says "the IRS and the courts may recompute taxable income from one year", even a closed one, to determine the tax for another.

In Wagner, a self-represented taxpayer sent the IRS Appeals office a letter, with no records attached, claiming a $171,334 carryover from his S corporation's losses going back to 1998, and argued the IRS had to accept it because the limitations periods for those years may have expired. The Court called that a "mistaken view".

So once the assessment period (normally 3 years) has run, the IRS cannot assess more tax for the loss year, but it and the Court can still recompute that year to decide how much NOL is left. Raising the Statute of Limitations in Tax Court covers that defense for the year in your notice.

What Evidence Works, and What Does Not

Aulisio doubles as a list of what to bring. The taxpayer "introduced no other evidence or documents regarding (1) how the NOL was computed or (2) bills, receipts, books, checks, or records of the entity that incurred the NOL", and his documents did not "establish the date, amount, calculation, and use of the NOL from its origin through the intervening years to 2015."

What the Court has rejected:

• Returns alone, and ledgers without the source documents behind them (Anderson).
• "Depreciation schedules and accounting worksheets" (Greenblatt).
• Transcripts without the carryback-year returns (Greenblatt).
• Demanding that the IRS name the documents it wants (Kerstetter).
• Expecting the IRS to compute the carryover. McRae: "But the burden of claiming and substantiating NOLs rests with the taxpayer."

What the Court looks for is the reverse: the loss-year source documents, the returns and transcripts for every year in the chain, and a computation that ties them together.

If Your Loss-Year Records Are Gone

Records missing from your files may still exist elsewhere:

• Banks and card issuers: statements and copies of canceled checks.
• Your former preparer: the file and workpapers for the loss year, including any Form 172 or NOL statement. Ask in writing. Your tax-software account may also hold complete copies of past returns.
• The partnership or S corporation, or its accountant: the Schedules K-1, the entity's own returns, and its basis and capital-account records.
• Lenders and county records: loan, sale, and foreclosure papers, and any Form 1099-A or 1099-C.
• Bankruptcy court records, if a bankruptcy was involved.
• The IRS: transcripts, and copies of returns for about seven years (see How To Check the IRS's Numbers, below).

How To Prepare Your Evidence for Tax Court explains how to use secondary evidence when originals are lost. Your own account will not fill the gap. In Aulisio, where the taxpayer testified that the NOL records had been lost, the Court said: "Absent some other corroborating documents, tax returns (or portions thereof) that simply restate a taxpayer's claim coupled with a taxpayer's testimony are not sufficient to substantiate a taxpayer's entitlement to a loss carryforward."

Be realistic, too. If the loss year cannot be documented, the achievable goals may be the penalty, the interest, or a settlement on the part you can prove (see Partial Wins and Settlement, below).

How To Check the IRS's Numbers

NOL adjustments ripple across years, and the IRS's paperwork can be wrong. In Mirch, the Court noted "typographical errors in the explanation of adjustments for 2007 attached to the Notice of Deficiency."

1. Get the IRS's carryover schedule. Look for it with the examination changes attached to the notice. If it is not there, ask the IRS attorney for one informally after you file your petition. The IRS's answer to your petition names the attorney (What Happens After You File Your Tax Court Petition; How To Handle Discovery and Pretrial Preparation).
2. Sort each NOL into its regime. Pre-2018 NOLs come first and in full; the 80% cap applies only to later NOLs used in 2021 or after.
3. Rebuild the chain on Form 172, Part II, one column per year, starting with the earliest year the loss had to go to. Use each year's taxable income as finally determined, including audit changes.
4. Check the 80% arithmetic, and any excess business loss added to the NOL.
5. Pull transcripts for every year in the chain. An account transcript shows taxable income and "changes made after you filed your original return"; it is online for the current and nine prior years, and on Form 4506-T for older ones. A tax return transcript, free for the current and three prior years, "shows most line items from your original Form 1040-series tax return as filed". Transcripts ordered by mail take 5 to 10 calendar days to arrive. Copies of the returns themselves cost $30 each on Form 4506, can take up to 75 calendar days, and are kept only about seven years (How To Get and Read Your IRS Transcripts).
6. Read the carryback transaction codes (TCs) (Document 6209, the IRS's manual of processing codes; How To Read IRS Transcript Codes): TC 295 and 294 are a tentative carryback allowance and disallowance, TC 305 and 304 the same by Examination, and TC 340 and 341 restricted interest.
7. At the Rule 155 stage (the computation after the Court's opinion; see below), check that allowed NOLs were carried back before forward where required, in the right order, against the right 80% base, and without any reduction of self-employment tax.

Procedure That Is Specific to NOL Cases

What the Court Can and Cannot Decide About Other Years

The Court decides the deficiency only for the years in your notice. Other years come in as facts, but under § 6214(b) the Court has "no jurisdiction to determine whether or not the tax for any other year or calendar quarter has been overpaid or underpaid", and under § 6512(b)(1) it can find an overpayment only for the same year as the notice. A refund for the loss year or an intervening year needs its own timely claim (below).

Raise every carryover and carryback that touches your year. Under § 6511(d)(2)(B)(iii), a final Tax Court decision is conclusive about the NOL deduction except for a carryback that "was not an issue in such proceeding". A carryback the Court decided cannot be reopened with a later refund claim, while one never raised can survive. Laidlaws Harley Davidson Sales, Inc. v. Commissioner, T.C. Memo. 2023-90, a later collection case in which the company had counsel, explained Ron Lykins this way: "This statutory scheme indicates that net operating loss carryback claims survive a deficiency case and may be asserted later by the taxpayer."

That exception is narrow. It covers only a carryback into the year in your notice, from a later loss year, that the case never touched, and only through a refund claim filed within the § 6511(d)(2) period, a Form 1045 application filed within 12 months after the loss year, or, if the tax is unpaid and the IRS moves to collect it, a collection due process hearing (below). A carryforward into the year in your notice gets no such exception: leave it out of your petition and it is conceded (see the next section), and the decision on that year's tax becomes final.

The IRS can ask for more. Under § 6214(a), the Court can find a larger deficiency than the notice shows if the IRS asserts it "at or before the hearing or a rehearing". In Aulisio, the NOL came into the case through the taxpayer's own amended return and his pleadings, and the IRS used income reported on that same return to assert an increased deficiency. The IRS has to prove an increase it pleads (Rule 142(a)(1)), but an NOL you raise stays yours to prove. Aulisio: "Because he raised the NOL as a new matter, the burden of proof remains with petitioner." Can the IRS Raise Your Bill in Tax Court? covers increases in full.

Put the NOL in Your Petition

Under Rule 34(b)(1)(G), "Any issue not raised in the assignments of error will be deemed conceded." The assignments of error are the part of your petition that says what the IRS got wrong, so an NOL you leave out is treated as given up. The same goes for the penalty and any additions to tax: list each one as a separate error, or it is conceded too (How To Fight the IRS Accuracy-Related Penalty in Tax Court; Can Tax Court Remove Your Late-Filing Penalty?).

On the simplified petition, Form 2, item 5 asks why you disagree and item 6 asks for the facts you rely on. For an NOL, list the loss year, the amount, the cause, whether a waiver statement was filed, and the carryover you claim for each year. Do not attach evidence. How To File Your Tax Court Petition covers the rest, including the $60 filing fee.

For example, if the IRS disallowed all of a $28,000 NOL deduction for 2024 that came from a 2022 loss, the wording could be as simple as this:

Item 5: (a) The IRS erred in disallowing the $28,000 net operating loss deduction for 2024. (b) The IRS erred in determining the accuracy-related penalty for 2024.

Item 6: My 2022 business loss created a $60,000 net operating loss. I deducted $32,000 of it for 2023 and the remaining $28,000 for 2024, as shown on the Form 172 attached to my 2024 return.

Do not rely on an amended return instead. In Shaut, the taxpayer sent the IRS an amended return after the notice, with a letter from his CPA asking the IRS to reinstate a carryover NOL of about $570,000; the Court noted that it "has not been processed or accepted by the IRS." The petition is what puts the NOL before the Court.

Be specific. In Rivas v. Commissioner, T.C. Memo. 2016-158, the IRS won on summary judgment, a ruling without a trial when the key facts are not in dispute (Common Tax Court Motions and How To Respond). The Court noted: "At no point in this case has petitioner alleged the precise amounts of the claimed losses or the years in which they were incurred." If you left the NOL out, Rule 41(a) says leave (permission) to amend "will be given freely when justice so requires", and Mirch shows the Court may hear an NOL raised late if the IRS knew about it. Do not rely on either.

Small case or regular case? If each year's dispute is $50,000 or less, you can choose the simpler small case procedure, but its decisions cannot be appealed and are not precedent (§ 7463(b); Small Case or Regular Case: Which Should You Choose?).

Stipulations and Cases Decided on Paper

Rule 91(a) requires a stipulation of facts, the document in which you and the IRS agree on facts and exhibits before trial (The Stipulation of Facts in Tax Court). Prior-year returns, transcripts, and the IRS's carryover schedule are natural exhibits for it. Submitting a case on stipulated facts under Rule 122 "does not alter the burden of proof": Mosley and Bryan were decided that way, and both lost the NOL for lack of proof.

The pretrial deadlines matter too. Under the standing pretrial order in a regular case, documents you plan to use at trial that are not in the stipulation must be exchanged with the IRS no later than 14 days before the trial session, and "The Court may refuse to receive in evidence any document or material that is not filed as a Proposed Trial Exhibit no later than 7 days before the first day of the trial session." The small-case order sets the same 14-day and 7-day dates. Loss-year records that surface at the last minute can be shut out.

Rule 155: Where the Arithmetic Gets Done

Most NOL opinions leave the final numbers to Rule 155, because the carryover must be recomputed from the Court's findings. The parties file computations, generally within 90 days after the opinion is served unless the Court directs otherwise (What Happens After Your Tax Court Decision). It is not a retrial, but it is where you check the IRS's absorption math. In Greenblatt, the Court directed that "the Rule 155 computation must carry back any allowed NOLs to the extent allowable before carrying them forward."

Claiming a Carryback Refund: Form 1045 or Form 1040-X

This matters today mainly for farming losses, and for anyone still inside the refund window for an older loss. The two routes are not the same:

Under IRC Section 6411, Form 1045 "shall not constitute a claim for credit or refund" (with one narrow interest exception), and the IRS acts after only "a limited examination of the application, to discover omissions and errors of computation therein". As the Form 1045 instructions put it, "no suit challenging the disallowance can be brought in any court."

For a calendar-year 2020 loss, the Form 1040-X window ran 3 years from the 2020 return's due date, including extensions, so for most filers it closed in 2024 unless the loss year's assessment period had been extended by agreement. Check your own dates, including any disaster postponement. A denied refund claim leads to a refund suit, not the Tax Court, unless the year is already in a Tax Court case (Tax Court vs. District Court vs. Court of Federal Claims; How To File an Amended Return).

When the IRS Claws Back a Tentative Refund

If the IRS later decides a Form 1045 refund was too much, IRC Section 6213(b)(3) lets it assess the excess without a notice of deficiency, "as if it were due to a mathematical or clerical error appearing on the return" (an exception to the usual protection; see How IRC § 6213 Protects You While Your Tax Court Case Is Pending). The regulation, Treas. Reg. § 301.6213-1(b)(2), is explicit: "Such notice will not constitute a notice of deficiency, and the taxpayer may not file a petition with the Tax Court of the United States based on such notice." The IRS can instead issue a notice of deficiency or sue under § 7405, and § 6501(h) gives it as long as the loss year stays open for assessment.

The usual math-error remedy does not apply either. Section 6213(b)(3) lets the IRS assess the excess "without regard to the provisions of paragraph (2)", which is the paragraph that normally lets you demand, within 60 days, that a math-error assessment be abated and sent through the deficiency process.

So a recapture bill is not a 90-day letter, and a 60-day abatement request will not undo it. The routes to contest it are a collection due process hearing (below) or paying and claiming a refund. If you cannot pay it at once, see How To Set Up an IRS Installment Agreement. A prior Tax Court case does not end the matter for either side: in Ron Lykins, involving a company (RLI) that appeared through its officer, the Court held "that res judicata neither bars RLI from asserting the NOL carryback nor bars the IRS from recapturing the tentative refunds allowed on account of the NOL carryback". (Res judicata is the rule against relitigating a decided claim.)

The Collection Due Process Route

A collection due process (CDP) hearing is the IRS Appeals hearing you can request within 30 days of a CDP notice (a final notice of intent to levy, or notice that a federal tax lien was filed), with Tax Court review afterward. CDP normally cannot be used to dispute a liability you already had a chance to dispute, but Davison describes an exception for NOL carrybacks: "a taxpayer is entitled to assert NOLs in a CDP hearing after prior deficiency litigation."

The proof burden does not get lighter. Davison (a couple representing themselves) got only the part of their NOL claims the IRS found substantiated, and Mirch (reviewed from scratch because the taxpayers never received their notice of deficiency) lost the 2007 NOL carryback to 2006 entirely, because the reduced loss was used up in 2005.

If you take this route, state the NOL challenge as your reason on the hearing request (Form 12153, line 8), bring your Form 172 chain and the loss-year records to the hearing, and, if you petition the Tax Court afterward, list the NOL as an error in that petition too (Rule 331(b)(4)). See Collection Due Process Hearings.

Deadlines at a Glance

What Else Is at Stake: Penalties, Additions, and Interest

A disallowed NOL can cost more than the tax. One adjustment can raise tax in several years, each with its own interest and possibly its own penalty, and a recaptured tentative refund arrives as a bill with interest.

Years Outside Your Notice

A carryover can run through several returns. If later years also claimed it, the IRS can adjust each one still open for assessment, and those years may come in a separate notice of deficiency with its own petition deadline. Calendar every notice you receive.

Think about the next return you file, too. If you claim the disputed carryover again, be ready to prove it, and attach Form 172 and the NOL statement described above.

If you win, the Court's decision still covers only the years in your notice. It does not change your tax for later years, so claim any carryover left for those years on their returns, or on an amended return within the refund period. A federal change can also affect your state return, so check your state's rules.

The Accuracy-Related Penalty

A disallowed NOL often produces a "substantial understatement" under IRC Section 6662 (for individuals, more than the greater of 10% of the correct tax or $5,000, with 5% in place of 10% if you claimed the qualified business income deduction) and a 20% penalty on the resulting underpayment. The same penalty can rest on negligence instead, which the regulations define to include "any failure by the taxpayer to keep adequate books and records or to substantiate items properly" (Treas. Reg. § 1.6662-3(b)(1)). The defense is reasonable cause and good faith under § 6664(c)(1). When an accountant or attorney advises on a matter of tax law, "it is reasonable for the taxpayer to rely on that advice" (United States v. Boyle, 469 U.S. 241 (1985)).

A later carryback does not shrink the penalty (Treas. Reg. § 1.6664-2(f)). A preparer's mistake can support penalty relief if you reasonably relied on a competent preparer you gave complete information to, but relying on tax software generally does not (see McRae, below). Neither lowers what you must prove about the NOL itself. See How To Fight the IRS Accuracy-Related Penalty.

In the NOL cases:

• Relief for relying on a professional: Patacsil, on the NOL portion (the couple relied on their CPA, and the Court noted that "the rules on carrying them backwards and forwards are not intuitive and are often changed by Congress"), and Greenblatt, on every accuracy penalty.
• An IRS procedural failure: in Duffy, the IRS did not prove the supervisory approval that § 6751(b) requires (The Penalty Defense That Costs You Nothing).
• Conceded or stipulated: Aulisio and Bryan.
• Split: Chapin lifted the penalty on the income adjustments and some disallowed deductions, given the taxpayers' age and the passage of time, but not on the NOL portion or on several other deductions.
• Sustained in most of the rest, including Kerstetter, Shaut, Filler, McRae (returns prepared with tax software, with no professional advice, did not show reasonable cause), and Gould.

No accuracy penalty in a year with no return. Under § 6664(b), the penalty applies "only in cases where a return of tax is filed", and an IRS substitute for return does not count. In those years the exposure is additions to tax (penalties by another name) instead: § 6651 for filing and paying late and § 6654 for estimated tax. The notice in Fussell included all three additions.

The Late-Filing Trap

Taxpayers who expect an NOL to wipe out the tax sometimes file late. If the NOL fails, the late-filing addition applies to the resulting deficiency. Kerstetter: "However, a mistaken belief that the section 6651(a)(1) addition to tax would not apply because the taxpayers do not expect to owe any tax does not constitute reasonable cause." In Greenblatt, where the accuracy penalties fell, the late-filing additions were sustained.

Interest, Including Restricted Interest

Interest on each year's deficiency runs from that year's original due date (How Interest Works on Your IRS Tax Debt), and because a Tax Court case typically takes 6-18 months, it keeps running while your case is pending. Three NOL-specific points:

• A carryback does not erase interest already owed. Under § 6601(d)(1), a carryback's reduction of an earlier year's tax does not change the interest for the period ending with the loss year's filing date. And the Supreme Court held in Manning v. Seeley Tube & Box Co., 338 U.S. 561 (1950) that a later carryback does not abate (cancel) interest already assessed on a deficiency.
• Restricted interest is figured by hand. Carryback adjustments can trigger what the IRS calls restricted interest, meaning its computer can no longer figure the interest on that year. Per Document 6209, "assessed interest thereafter must be computed manually and input with a TC 340 or 341". In Davison, the IRS applied the restricted interest rules to a 2005 abatement that came from a 2010 NOL carryback, and the Court found no abuse of discretion in how it did so.
• A zero on an exam report is not a promise. In Goldberg v. Commissioner, T.C. Memo. 2020-38, a collection case in which the taxpayer represented himself, the examination report (Form 4549) showed zero interest because the revenue agent could not compute restricted interest from NOL carrybacks. The Court held "that the May 2011 Form 4549 is not a binding contract under which the Goldbergs owed no interest for 2004".

Refund interest on a carryback starts late too: § 6611(f)(1) treats the overpayment as made no earlier than the loss year's filing date. Interest abatement under § 6404 is a separate, narrow remedy.

To stop interest from growing on the amount in dispute while your case is pending, you can make a deposit under § 6603; to the extent it is used to pay the tax, the tax is treated as paid when you made the deposit. How Interest Works on Your IRS Tax Debt explains how deposits work. If you lose and cannot pay at once, see How To Set Up an IRS Installment Agreement.

Self-Employment Tax Stays

An NOL reduces income tax, not self-employment tax. Under § 1402(a)(4), "the deduction for net operating losses provided in section 172 shall not be allowed" in figuring self-employment income. Winning the NOL will not remove self-employment tax from your notice.

Canceled Debt Can Eat Your NOL

If you excluded canceled debt because you were insolvent or in bankruptcy, or because it was qualified farm debt, § 108(b)(2)(A) reduces your NOLs first, after the tax for the discharge year is figured (§ 108(b)(4)(A)), unless you elected under § 108(b)(5) to reduce the basis of depreciable property first. That shrinks what carries into the next year. See Cancellation of Debt: How To Fight a 1099-C in Tax Court.

Partial Wins and Settlement

NOL disputes often end with the IRS allowing what can be proved. In Davison, the IRS allowed the couple's 2010 NOL, carried its $100,906 farming-loss portion back five years to 2005 (cutting that year's tax by $36,104), applied the rest to 2008 and 2009, and denied their other NOL claims: "Respondent allowed petitioners' NOL claims to the extent that they were substantiated." Compromises based on litigation risk, each side's odds of losing at trial, happen too. Kazazian v. Commissioner, T.C. Memo. 2017-135, a ruling on litigation costs rather than on the NOL, recounts an Appeals recommendation to allow 60% of the taxpayer's Schedule E losses and NOL carryforward, given the IRS's risk of losing on whether she qualified as a real estate professional.

Most (76%) of Tax Court cases close by formal settlement, and more than 99% end without a trial on the merits. See How To Settle Your Tax Court Case and What To Expect at Your IRS Appeals Conference.

Documents Checklist

For the loss year:

• The return as filed, with any NOL computation attached.
• The records behind the loss: bank statements, invoices, receipts, and canceled checks; loan papers and proof of worthlessness for a bad debt; sale or foreclosure documents; for partnership or S corporation losses, the Schedules K-1 plus your basis and at-risk records.
• The waiver statement, or proof it was attached (a software screenshot is not enough).
• Form 461 for any year with an excess business loss.
• Your former preparer's file and workpapers, if someone else prepared the return.

For every carryback year (unless you have a valid waiver) and every year in between: the returns as filed, with the Form 172 or NOL statement attached to any return that deducted the loss, any amended returns, account transcripts, audit reports or Tax Court decisions that changed taxable income, and any Form 1045 or Form 1040-X carryback claim with the IRS's response.

For the year in the notice: the notice, the examination report, the IRS's carryover schedule, your return with its Form 172 or NOL statement, and your correspondence with the IRS.

How long to keep them. Records must be kept while they "may become material in the administration of any internal revenue law" (Treas. Reg. § 1.6001-1(e)). The Form 172 instructions say to keep an NOL year's records until three years after you have used the carryback or carryforward, or three years after it expires. Post-2017 NOLs never expire, so keep the loss-year records until three years after the last year you use the loss. The IRS destroys its copies of old returns after about seven years, so yours may be the only ones left.

Common Mistakes

1. Treating the loss-year return as proof of the loss.
2. Skipping a year to save the loss. Absorption is automatic.
3. Assuming a closed year is locked. It can still be recomputed.
4. Reading a refund, a CP21B notice, or a no-change letter as agreement.
5. Forgetting the carryback years for a loss from 2020 or earlier, or the farming portion of a later loss, with no timely waiver.
6. Trusting software with the waiver instead of keeping the statement itself.
7. Filing late because the NOL zeroes out the tax.
8. Leaving the NOL out of the petition, or raising it without years and amounts.
9. Waiting for the IRS to compute your carryover.
10. Expecting the NOL to reduce self-employment tax.
11. Holding back the petition until the records arrive.
12. Forgetting to dispute the penalty and additions in the petition.

What To Do Now

1. Calendar the deadline: 90 days from the date on the notice (150 days if it was addressed outside the United States). See You Just Got a 90-Day Letter From the IRS, or, if the deadline has passed, You Missed the 90-Day Deadline. Now What? and How To Request Audit Reconsideration.
2. Identify the pattern the IRS used, from the notice and its explanation.
3. Place your loss in its regime, and check whether you filed a waiver statement.
4. Order transcripts and return copies now for every year in the chain: Get Transcript online, Form 4506-T for older years, and Form 4506 for copies of the returns, which can take up to 75 calendar days.
5. File the petition on time. You do not need the records or the rebuilt chain to file; the evidence comes later. List the NOL facts in items 5 and 6 of Form 2, and dispute the penalty and any additions too.
6. Rebuild the chain on Form 172, Part II, and compare it year by year with the IRS's schedule.
7. Gather the loss-year records from the checklist, including your former preparer's file.
8. Look past the tax: check the penalty, any additions, and the interest (a § 6603 deposit can stop it growing), watch for notices on later years, and later check the Rule 155 computation.

Get Help

NOL cases are heavy on records and arithmetic, and the Court itself has called the carryback and carryforward rules "not intuitive" (Patacsil). Help is worth seeking especially if your loss came through a partnership or S corporation, § 461(l) applies, several years in the chain were audited, or the interest involves carrybacks. If your income is at or below 250% of the poverty line and the amount in dispute is $50,000 or less, a Low Income Taxpayer Clinic may be able to help for free or low cost. In the most recent National Taxpayer Advocate comparison (fiscal year 2020), represented petitioners prevailed at trial in whole or in part about 23% of the time, versus about 12% for those who represented themselves. When and How To Get Professional Help With Your Tax Dispute covers the options.

Resources

Statutes and regulations:

• IRC Section 172 (net operating loss deduction), Treas. Reg. § 1.172-1 (NOL statement), and Treas. Reg. § 1.172-7 (joint returns)
• IRC Section 461 (subsection (l), excess business losses)
• Treas. Reg. § 301.9100-12T (waiver election) and Treas. Reg. § 301.9100-2 (six-month extension)
• IRC Section 6214 (other years), IRC Section 6512 (overpayments), and IRC Section 6511 (carryback refund claims)
• IRC Section 6411 (Form 1045), IRC Section 6213 (recapture), Treas. Reg. § 301.6213-1, IRC Section 6501 (subsection (h)), and IRC Section 7405
• IRC Section 6601 (interest), IRC Section 6603 (deposits), and IRC Section 6611 (refund interest)
• IRC Section 6662, IRC Section 6664, Treas. Reg. § 1.6662-3 (negligence), and Treas. Reg. § 1.6664-2 (accuracy penalty)
• IRC Section 1402 (self-employment income) and IRC Section 108 (canceled debt)
• IRC Section 465, IRC Section 469, IRC Section 704, and IRC Section 1366 (limits that come first)
• IRC Section 7491 (burden of proof), IRC Section 7463 (small tax cases), and Treas. Reg. § 1.6001-1 (records)

Tax Court:

• Tax Court Rules of Practice and Procedure: Rule 34, Rule 41, Rule 91, Rule 122, Rule 142, Rule 155, and Rule 331
• Form 2, Petition (Simplified Form) and the Standing Pretrial Order (regular cases, sample)

IRS forms and guidance:

• Instructions for Form 172 and Form 172
• Form 1045, Instructions for Form 1045, and Form 1040-X
• Schedule 1 (Form 1040) and Instructions for Form 461
• Excess business loss thresholds: Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40, and Rev. Proc. 2025-32
• Publication 536 will no longer be revised and Prior editions of Publication 536
• Get Transcript, Transcript types for individuals, and Form 4506
• Document 6209, Section 8A (transaction codes) and Form 12153 (CDP hearing request)

Cases cited:

• Welch v. Helvering, 290 U.S. 111 (1933): presumption of correctness
• New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934): deductions and loss carryovers exist only by legislative grace
• Reo Motors, Inc. v. Commissioner, 338 U.S. 442 (1950): the NOL follows the law of the loss year
• Manning v. Seeley Tube & Box Co., 338 U.S. 561 (1950): a later carryback does not abate assessed interest
• United States v. Boyle, 469 U.S. 241 (1985): reliance on professional advice
• Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930): estimating established expenses
• Keith v. Commissioner, 115 T.C. 605 (2000): the taxpayer proves the NOL and the amount carried
• Ron Lykins, Inc. v. Commissioner, 133 T.C. 87 (2009): closed years recomputed; carrybacks and recapture survive a prior case
• Gould v. Commissioner, 139 T.C. 418 (2012): returns alone are not proof; a no-change letter does not bind
• Kerstetter v. Commissioner, T.C. Memo. 2012-239: records never produced; late filing not excused
• Wagner v. Commissioner, T.C. Memo. 2015-120: a letter without records; closed years no bar
• Rivas v. Commissioner, T.C. Memo. 2016-158: no specific years or amounts
• Chaganti v. Commissioner, T.C. Memo. 2016-222: carryback years unproved
• Kazazian v. Commissioner, T.C. Memo. 2017-135: costs ruling recounting an Appeals litigation-risk recommendation
• McRae v. Commissioner, T.C. Memo. 2019-163: no NOL statement; the IRS will not compute it for you
• Goldberg v. Commissioner, T.C. Memo. 2020-38: restricted interest; Form 4549 not a contract
• Duffy v. Commissioner, T.C. Memo. 2020-108: loss-year adjustments; a valid waiver
• Filler v. Commissioner, T.C. Memo. 2021-6: no realized loss; other years' facts
• Villanueva v. Commissioner, T.C. Memo. 2022-27: absorption not disproved
• Patacsil v. Commissioner, T.C. Memo. 2023-8: no proven waiver; penalty relief on the NOL portion
• Bryan v. Commissioner, T.C. Memo. 2023-74: no basis or amount at risk
• Laidlaws Harley Davidson Sales, Inc. v. Commissioner, T.C. Memo. 2023-90: the carryback exception is specific to NOLs
• Davison v. Commissioner, T.C. Memo. 2023-139, aff'd, No. 24-9000 (10th Cir. Mar. 17, 2025) (unpublished; appellate review waived): NOLs in CDP; partial allowance; restricted interest
• Aulisio v. Commissioner, T.C. Memo. 2024-29: the whole chain; no estimates
• Anderson v. Commissioner, T.C. Memo. 2024-95: ledgers without source documents
• Shaut v. Commissioner, T.C. Memo. 2024-103: inconsistent carryforward amounts
• Greenblatt v. Commissioner, T.C. Memo. 2024-109: no waiver; carry back first; late-filing additions sustained
• Mosley v. Commissioner, T.C. Memo. 2025-7: no proof of the loss; no waiver
• Mirch v. Commissioner, T.C. Memo. 2025-128: a carryback absorbed by the earlier year
• Fussell v. Commissioner, T.C. Memo. 2025-131: absorption whether or not claimed; processing is not agreement
• Chapin v. Commissioner, T.C. Memo. 2026-76: returns are not proof; penalty sustained on the NOL portion
• Risan v. Commissioner, T.C. Memo. 2026-78: no NOL statement; no evidence of the losses' origins

Companion articles on TaxCourtHelp:

• How To Deduct Rental and Passive-Activity Losses and How To Prove Your Business Expenses to the IRS
• Burden of Proof in Tax Court and The IRS Filed Your Return? Why It's Too High
• How To Fight the IRS Accuracy-Related Penalty and How Interest Works on Your IRS Tax Debt
• How To Get and Read Your IRS Transcripts and Collection Due Process Hearings
• How To File Your Tax Court Petition and What Happens After You File Your Tax Court Petition
• How To Prepare Your Evidence for Tax Court and Innocent Spouse Relief in Tax Court
• How To Set Up an IRS Installment Agreement and How To Find and Use a Low Income Taxpayer Clinic

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.