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By Tripp Baltz
The need to align with new Internal Revenue Service partnership audit rules presents a good opportunity for states to amend their relevant statutes, but they should hold off doing so until 2018 or 2019, several tax practitioners said.
“This is a perfect time to rework your statutes, but there’s not a huge rush,” said Fred Nicely, senior tax counsel with the Council On State Taxation. “This doesn’t really take effect until Jan. 1, 2018, and there’s a lot of grayness in the law that Congress needs to address. And the first audits probably won’t come until 2020 or 2021.”
Nicely spoke during a recent panel on the new federal partnership audit regime that was included as part of the 2015 Bipartisan Budget Act and that Congress is expected to address as part of a technical fix bill in the first half of 2017. The federal bill concerns assessments, including penalties and interest, that partnerships will be required to make after an audit results in adjustments to income.
Audit adjustments often have impact at the state level, and all corporate income tax states using a taxpayer’s federal tax liability as a starting point require the federal adjustments to be reported to the state. States will have to amend their laws outlining reporting requirements when partnerships have to make adjustments to a federal return.
Lately, several tax policy organizations have been advising states to take a “wait-and-see” approach before amending their own laws, although two states have already initiated changes: Arizona with an act in 2016, and Montana with a bill in the early days of its 2017 legislative session. The sponsor of the Montana bill has recently acknowledged the measure “needs work.”
When legislatures do begin to implement changes and approve conforming legislation, they will have a chance to promote uniformity across state taxing regimes, Nicely and other panelists said. The discussion took place during a meeting of the National Conference of State Legislatures’ Task Force on State and Local Taxation in Scottsdale, Ariz.
COST, the Tax Executives Institute, the American Institute of CPAs and the State and Local Tax Committee of the American Bar Association Section of Taxation, recently proposed a model state law for reporting federal audit adjustments. They also proposed changes to the Multistate Tax Commission’s 2003 model uniform statute for reporting federal tax adjustments.
Panelist Tom Shimkin, legislative counsel and director for the MTC, said the MTC Uniformity Committee is considering whether to make the establishment of a new model statute a project of the committee. He said he couldn’t speak for the committee, but added it is expected to consider the proposed changes to the model at its next meeting in March in San Diego.
“There are gaps in each model,” both the new model proposed by the groups and MTC’s 2003 model statute. “But the MTC model is old. We can update it, and we should.”
Shimkin said the MTC model doesn’t define “final determination” very well—COST, TEI, and the other organizations would like to clarify the definition. He said the MTC model also doesn’t deal with estimated payments after an adjustment. It can be difficult to make an estimated payment in some states to stop interest, one of the problems facing taxpayers.
Both Shimkin and panelist Pilar Mata, tax counsel for TEI, noted that the MTC model hasn’t been widely adopted by the states.
“As states are looking to incorporate necessary changes, if we can incorporate those into a model statute, we can take the guesswork out for you,” she said. For example, the groups have “worked on a definition that is comprehensive and clear for “final determination” that promotes uniformity and incorporates concepts from the internal revenue code and underlying regulations.
Another proposed solution is to allow taxpayers to file a streamlined report that could be filed in multiple states to report federal audit adjustments, in lieu of requiring taxpayers to file a complete amended state return, she said.
Uniformity among states is a joint goal of the MTC and the groups proposing changes to the model statute, the panelists said.
“At present, state statutes on this are like snowflakes. No two are alike,” panelist Nikki Dobay, senior tax counsel with COST, said, quoting Bruce Ely, a tax practitioner with Bradley Arant Boult Cummings LLP in Birmingham, Ala. who chairs the ABA task force advancing the model law.
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