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By Tripp Baltz
Tax policy groups proposed amendments to the Multistate Tax Commission’s model state law for reporting federal audit adjustments in response to concerns arising out of the new federal partnership audit regime.
The proposal, submitted Dec. 14 during the MTC’s Uniformity Committee meeting in Houston, is designed to address the state and local impact from changes to the federal partnership audit procedures, enacted in November 2015 as part of the Bipartisan Budget Act of 2015 ( Pub. L. No. 114-74). The 2015 law codified new rules for how the Internal Revenue Service will handle audits and adjustments for partnerships.
Practitioners have recognized that state and local taxing jurisdictions will be required to substantially amend their statutes for reporting audit adjustments in light of the federal legislation—known as revenue agent report (RAR) laws. Almost all states require taxpayers to report changes resulting from federal income tax audits to state tax agencies, and taxpayers are generally required to file amended state income tax returns reflecting federal reported changes.
However, states differ on the time they allow for taxpayers to report changes, the specific triggering events or actions requiring a reporting adjustment, and the reporting format, according to the Tax Executives Institute Inc. TEI submitted the model statute along with the American Institute of CPAs, the Council On State Taxation (COST), and the State and Local Tax Committee of the American Bar Association Section of Taxation.
The groups also asked the Uniformity Committee to initiate a project to draft a new MTC model RAR statute.
The MTC adopted a uniform model statute for reporting adjustments in 2003, but states and localities haven’t adopted the model widely, Nikki E. Dobay, West Coast counsel for COST, and Pilar Mata, tax counsel for TEI, said in their presentation on the new proposal.
“As states are considering how to incorporate the changes, they are going to need to amend their reporting statutes generally,” Mata said. “It provides a unique opportunity to look at updating their statutes and make improvements.”
Gregory S. Matson, executive director of the MTC, said the request for a project to draft a new model statute was “worthy of this group’s attention” and consistent with the Multistate Tax Compact’s goals of promoting uniformity among state tax laws and increasing efficiency for tax administration. However, he said, it isn’t the MTC’s job, as a group of tax administrators, to “advance proposals through the state legislative process.”
“‘No two snowflakes are alike’ also applies to state RAR statutes,” Bruce P. Ely, a partner at Bradley Arant Boult Cummings LLP in Birmingham, Ala., told Bloomberg BNA in a Dec. 14 e-mail.
RAR statutes “are widely divergent and sorely in need of uniformity—even if there wasn’t the need to conform them to the new federal partnership audit rules and their rollout,” he added.
Ely is co-chair of a task force of the ABA tax section’s SALT committee that has partnered with COST, TEI and the AICPA to develop a “set of recommendations to the states for a ‘best practices’ partnership audit conformity statute.”
The groups are asking for a RAR drafting project even before the MTC and states commence work on conformity legislation. The MTC partnership work group placed on hold its project to develop uniform conformity language, allowing time for Treasury guidance or enactment of the Tax Technical Corrections Act of 2016 (H.R. 6439/S. 3506).
The wide variance in state laws, coupled with taxpayers rushing to comply, translates to “more errors in reporting,” leading to further adjustments by states, Mata said. “If we can do this more efficiently, it’s a win-win that will help taxpayers as well as states.”
Dobay said the draft RAR statute retains the 180-day reporting period provided in the MTC’s model statute, but proposes several changes. It sets forth a separate section for definitions, some of which will be state-specific. It also revises the definition of “final determination” to be more comprehensive and incorporate concepts from the Internal Revenue Code and underlying regulations, she said.
The proposed model clarifies that the filing a report reflecting federal audit changes also constitutes a refund claim, regardless of whether an amended state return is filed. It creates a de minimis exception when adjustments to taxable income result in an assessment or refund of less than $250 in tax. In such situations, no report of changes would be required, she said.
While the MTC partnership work group has suspended its drafting efforts on conformity language, the group said it would consider providing input to the IRS regarding the federal regulations it is drafting.
The work group has been discussing recent technical corrections that appear to allow multi-tier partnerships to make a push-out election, among other issues, MTC General Counsel Helen Hecht, told the Uniformity Committee.
Ely said the task force urges the states to “pause and let federal developments unfold next year, both the likely passage of the Tax Technical Corrections Act and the issuance of Treasury guidance.”
He said it was surprising the Montana Department of Revenue “quietly drafted and pre-filed a federal conformity bill (H. 47),” especially in light of advice from IRS Commissioner John Koskinen and the MTC “to states to take a go-slow approach.”
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The proposed model statute is at http://src.bna.com/kKu.
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