Model Act Clarifies Procedural Issues in State Partnership Audits

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Che Odom Ryan C. Tuck Washington Deputy News Director

By Che Odom

Procedural disconnects exist in the way the new federal partnership audit rules work and the way state statutes governing reporting of federal adjustments are currently worded.

That’s according to Dan De Jong, a senior manager in KPMG LLP’s Washington National State and Local Tax Group.

“There are significant disconnects that I think could result in a lot of uncertainty,” he said March 24 at a meeting in Washington of the National Conference of State Legislatures’ Task Force on State and Local Taxation. Such disconnects are related to who must represent a partnership during an audit at the federal and state levels and how states should treat imputed underpayment of taxes.

De Jong, an attorney and tax practitioner, is working with a group to develop for states a model partnership audit statute that would address such nagging questions, he said. Work on the model law may be nearly complete.

The model law should be ready in plenty of time for the first audits under the new federal regime. Those wouldn’t be until 2020, according to practitioners who have been working on it since the federal Bipartisan Budget Act of 2015, which took effect Jan. 1, created a centralized federal partnership audit regime.

The practitioners, known as the “interested parties,” come from several groups. Those organizations include the Council On State Taxation (COST), Tax Executives Institute Inc., the Institute for Professionals in Taxation, the American Institute of CPAs, and a task force of the American Bar Association tax section’s State and Local Tax Committee.

When the model statute is complete, the Multistate Tax Commission will consider whether to formally adopt and endorse it to states, Helen Hecht, general counsel to the MTC, has told Bloomberg Tax. However, many states have already been looking at the drafts of the model act as the work has progressed, and some states, including California, have already begun to move on the issues, she said.

The interested parties, most of which consist of tax professionals representing businesses, hope state lawmakers delay adopting laws until their model is ready. They say the statute would promote uniformity across states and predictability for taxpayers, making compliance easier.

Imputed Underpayment, Partnership Representative

One of the disconnects is that it wasn’t clear to De Jong what the imputed underpayment is at the federal level.

“That is the payment that a partnership would make after receiving its audit adjustments and electing to pay the tax on those audit adjustments,” he said. “Is that a tax on the partnership? Is that a tax that is really the tax of the partners but paid by the partnership? I think that is unclear.”

Most states don’t tax partnerships at the entity level, which means it’s difficult to know without changes at the state level what the implication would be of a federal audit adjustment and payment at the partnership level, he said.

The new model statute would address imputed underpayment, as well as who could serve as the partnership representative at the state level, Jonathan Horn, senior manager at the American Institute of CPAs, said during the task force meeting.

A partnership representative is an individual who is, at the federal level, given the authority to make decisions related to the audit for the partnership, De Jong said.

The role is a new one, which takes over what used to be a tax managing partner under old rules, De Jong said. The model uniform statute should help clarify whether the federal partnership representative’s authority carries over to the state level or whether a state would allow someone else such decision-making authority.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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