Practice and Procedure: When an RAR Can Extend an Otherwise Closed State Statute of Limitations

Internal Revenue Agency adjustments (RARs) or taxpayer amendments to federal income tax returns can trigger a myriad of state administrative burdens for multistate taxpayers. It is important for taxpayers to know that an RAR may extend an otherwise closed statute of limitations for state tax purposes. Understanding the types of taxpayer actions with respect to an RAR can reopen a state’s statute of limitations can be difficult because jurisdictions differ on what they deem to be a triggering event, the  Bloomberg BNA’s 2016 Survey of State Tax Departments shows.  

Twenty-four states said signing IRS Form 870 for one audit, when other issues are still under review, constitutes a reportable adjustment after the state’s normal statute of limitations has expired. More states—26—said they would deem a partial settlement of federal tax issues reported and paid to the IRS to be a reportable adjustment under this scenario. Similarly, Form 4549-A would be deemed a reportable adjustment in 27 states and Form 886-A would be considered a reportable adjustment in 19 states.

Nearly every jurisdiction agreed that final federal tax changes would constitute a reportable adjustment under these circumstances. Only three jurisdictions—the District of Columbia, Kentucky and Maryland—said their answers to the questions on this issue would change if the case involves a refund of federal taxable income.

Another question for state tax compliance purposes involves other types of adjustments such as those made by other states, local jurisdictions or foreign governments. Most states agreed that changes by other types of tax agencies, such as other states, municipalities or foreign governments, do not constitute a reportable adjustment after the state’s normal statute of limitations has expired.

State requirements with respect to RARs is a gray area that is likely to continue to raise questions among practitioners. Bloomberg BNA will continue to track each jurisdiction’s policies regarding this topic in its annual survey. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are there any other gray areas with respect to RARs that we should be asking states about in the survey?

For more information about state tax issues, sign up for a free trial  on Bloomberg BNA’s Premier State Tax Library.