New Model Out on Partnership Audit Adjustments for States

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

A coalition of tax groups has updated its proposed model state statute to better link it to new Internal Revenue Code sections that prescribe partnership audit and assessment rules.

Conformity of state regulations with the federal code in the realm of partnership audits is “one of the guiding principles” of the model-statute effort by a coalition of interested parties, said Bruce P. Ely, senior partner in the Birmingham, Ala., office of Bradley Arant Boult Cummings LLP.

The interested parties have persuaded the Multistate Tax Commission’s Uniformity Committee and Partnership Work Group to use their model statute as a starting point for a MTC model act. The latest draft of the model statute was submitted to the MTC groups Sept. 27 and unveiled Sept. 28 during a conference call involving the interested parties, state officials, and the MTC.

“What we’re hoping to avoid is dueling model acts,” said Ely, co-chair of the American Bar Association’s State and Local Tax Committee task force on the state implications of the new federal partnership audit rules. “If we can march arm-in-arm to the various state legislatures next spring and pass a uniform bill, it’ll be a win-win for taxpayers and the states.”

The other interested parties include the Council On State Taxation, the Tax Executives Institute Inc., the Institute for Professionals in Taxation, and the American Institute of CPAs.

The MTC has been working for the last several months on addressing the state-side impact from the new default regime for partnership audits enacted through the 2015 Bipartisan Budget Act.

The Internal Revenue Service’s proposed regulations (REG-136118-15, RIN:1545-BN77), which will carry out the regime, generally provide for assessment and adjustments at the entity level, rather than among individual partners, and they have generated rampant questions and concerns over the flow-through impact at the state level. The law goes into effect in 2018.

Updated Draft

The latest draft clarifies various options that a partnership has, after an IRS audit, while assuring the states that if the partnership has been filing either a nonresident composite return or withholding return, the partnership is bound to pay the tax on behalf of the nonresident partners, Ely said.

“That’s always a problem with the states—tracking down the little old lady in a different part of the country to collect a small amount of tax,” he said.

The interested parties also tried to address in their latest draft of the model statute some of the unique issues with tiered multistate partnerships, which have been problematic for states in recent years as the number and ownership complexity of these entities increases, Ely said.

“Our goal is to convince the states and the MTC to use our model statute as a fair and balanced attempt at streamlining the reporting process for taxpayers while not depriving the states of the tax they are entitled to collect as a result of what we expect to be substantially increased IRS audits,” he said.

The MTC is the administrative agency for the Multistate Tax Compact, an agreement among states to promote uniformity in significant components of state tax systems and facilitate taxpayer convenience.

To contact the reporter on this story: Che Odom in Washington at

To contact the editor responsible for this story: Jennifer McLoughlin at

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