You Make the Call - July 2, 2026

Question: Tom’s business generated a net operating loss (NOL) in 2018, which is being utilized in 2025. He wonders if the IRS can examine the year the NOL was created (2018) even though the statute of limitations on that year has passed. As a related matter, must he then keep all records for all NOL years for as long as the NOL is carried forward, with no time limit? 

Answer: Yes. The IRS can generally examine the year in which an NOL originated, even if the normal statute of limitations for that year has expired, when the NOL is being used in an open year such as 2025. The IRS Internal Revenue Manual (IRM) states:  

“The Service may redetermine correct taxable income in a closed year in order to ascertain either the amount of an NOL, or the amount of an NOL that is absorbed in the closed year for purposes of determining the correct net operating loss deduction for an open year.”  

The authority for this comes from §7602 and related case law. Courts have consistently allowed the IRS to recompute closed years when necessary to determine the correct tax liability in an open year involving an NOL carryforward.  

Tom should keep records supporting the NOL for as long as needed to substantiate the carryforward.