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By Tripp Baltz
A bill before the Montana Legislature would make the state the second to propose revisions to its reporting adjustments in compliance with new IRS partnership audit rules.
The measure ( H.B. 47), which had its first reading before the Montana House Taxation Committee Jan. 2, would impose new reporting requirements for partnership returns with federal adjustments. The bill, sponsored by committee member Rep. Zach Brown (D), includes new payment deadlines applying to tax years beginning after Dec. 31, 2017. The Montana Department of Revenue requested the legislation.
Bruce P. Ely of Bradley, Arant, Boult Cummings LLP in Birmingham, Ala., told Bloomberg BNA that he wishes Montana and other states would “slow down and take a wait-and-see approach.”
“It would be a shame if they go ahead and pass a bill that’s already out of sync with federal rules,” he said, noting that Arizona passed similar legislation in May. “We don’t want states marching off a cliff like lemmings.”
He said it would be preferable for states to wait until next spring before passing conforming legislation.
The Bipartisan Budget Act of 2015 (Pub. L. No. 114-74) modified the rules governing federal audits of partnership entities, providing for assessment and adjustments at the entity level—rather than among individual partners—absent an election that would transfer liability to the partners.
An impetus for this seismic shift was lost collection opportunities for underpaid taxes from partnerships, which have been subject to record-low rates of federal audits that are resource-intensive and time-consuming. However, the seemingly streamlined regime has drawn a flurry of questions and concerns regarding its complexity.
Internal Revenue Service Commissioner John Koskinen and the Multistate Tax Commission have advised states to go slow on enacting legislation. Congress is expected to approve a technical corrections bill in the first part of 2017, addressing questions that remain about the new partnership audit regime.
“I really wish Montana would slow this mustang down,” Ely said.
Among other changes, the Montana law would require partnerships to file a new return with the state DOR if the IRS adjusts a federal partnership return and assesses an underpayment, or if the partnership makes an election for an alternative adjustment. The return for the reviewed year must show the federal adjustments and any correlative adjustments, the bill states.
The new “push-out” process in the federal rules is an area that is expected to be particularly complex for states and will likely be an important focus of the MTC’s work as it pursues uniformity in state taxing regimes, the group agreed in December.
Ely said he expects other states to follow Montana’s lead and propose revisions early. “I doubt it’ll be the last of the year, and we certainly will continue to ask them to wait and see.”
The IRS partnership audit rules don’t take effect until Jan. 1, 2018, and there will be no federal audits until Jan. 1, 2020, he said. “What’s the hurry?”
Lee Baerlocher, administrator in the Montana Department of Revenue, told Bloomberg BNA that the department requested the bill because state rules currently require partnerships to pay audited assessments as a flow-through, on individual income tax returns.
“Our feeling was, let’s conform, and if you file with the federal government and pay the adjustment at the partnership level, you can do the same thing in Montana,” he said.
The legislation may be attractive in Montana irrespective of what happens ultimately at the federal level, Baerlocher said. The state has received requests from partnerships to provide for payment of adjustments through the partnership for adjustments that have been made at the state level, he said.
Ely is one of the co-authors of a Model Uniform Statute for Reporting Adjustments to Federal Taxable Income presented to the MTC in December at committee meetings in Houston. The draft came out of a task force spearheaded by the American Institute of CPAs, the Council On State Taxation, the Tax Executives Institute, and the American Bar Association’s Section of Taxation’s State and Local Tax Committee.
The task force has asked the MTC to endorse the new draft, which amends and updates the commission’s existing 2003 model revenue agent report (RAR) statute, he said. The MTC’s Uniformity Committee is expected to consider the request at its March meeting in San Diego.
At recent meetings of an MTC partnership work group, members discussed how uncertain the partnership audit regime situation is, especially in light of expected changes coming from Congress. “State by state enactment of new rules is not expected to help with that uncertainty,” Sheldon Laskin, MTC counsel and the staff person tasked to the work group, told Bloomberg BNA.
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