Corporate Close-Up: States Urged to Diverge from Two Aspects of New Federal Partnership Audit Rules


The federal Bipartisan Budget Act of 2015 included several reforms to partnership audit procedures generally applicable to tax years beginning after 2017. One of the most important changes under the new law is that it allows the IRS to assess and collect from partnerships at the entity level for 1065 and Schedule K-1 issues. As part of an initiative to draft model state legislation aimed at conforming to the federal changes, an ABA task force suggested two instances where states might want to diverge from federal audit procedures.

State conformity to this and other changes under the act will require each state to enact legislation specifically adopting the federal reforms. Arizona is the only state to have amended its laws to adopt the federal changes.

The Multistate Tax Commission has launched the Partnership Informational Project to create model legislation for other states. Before a recent brainstorming session for project participants, the American Bar Association Tax Section, State & Local Committee Task Force on the State Implications of the New Federal Partnership Audit Rules submitted a memorandum outlining the key items it said must be considered in drafting model conformity legislation. The task force said it believes that the states should generally conform to the federal rules. But it said there were two notable exceptions:

The new federal partnership audit rules allow for a so-called “push-out” election that allows a partnership to opt against having an adjustment assessed and collected at the entity level and choose instead to push out any adjustments to the partners by issuing adjusted Schedule K-1s. When a partnership has made such an election at the federal level, the ABA task force said “we believe the states should allow partnerships to opt-out of their federal election so that the partnership itself remains liable for any state tax deficiency.” This would simplify state compliance by not requiring each partner to report liability for relatively minor adjustments, the task force explained.

“A similar opt-out election should be available with respect to the I.R.C. § 6225 ‘pay-up’ procedure so that the partnership would remain liable for the state adjustment if the partnership representative so elects, rather than asking all the reviewed year partners to prepare and file multiple amended state returns, etc.,” the task force said. “This would be especially true in the case of states that impose either composite return on nonresident withholding (or both) requirements at the partnership level,” the task force concluded.

Continue the discussion on LinkedIn: should states diverge from any other federal partnership audit rules?

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