Tax Group Urges States to Stall on Partnership Audit Changes

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By David McAfee

A national advocate of business taxpayers is encouraging states to postpone changes to their partnership audit regime until 2019.

States have their hands full dealing with federal changes to the tax code, so they should put partnership audit regime amendments on the back burner until next year, according to Fred Nicely, senior tax counsel at the Council On State Taxation, a Washington-based trade association representing almost 600 multistate corporations. All states will have to conform eventually, but they don’t need to go into “panic mode,” he said.

Every state that has an individual or corporate income tax is “going to have to have a law change, at the state level, to be able to conform to the federal law changes,” Nicely said Feb. 10 at the American Bar Association’s Section of Taxation in San Diego.

“Most of the states may conform to the federal tax base, but when it comes to your assessment and collection powers, the states are all independent from the IRS on that, and that’s what we’re dealing with here--the federal audit procedure changes,” he said. “That’s something that the states can address next year. This year, I know a lot of states are focused on the impact of federal tax reform.”

It’ll probably be 2020 before the Internal Revenue Service actually conducts audits under the new regime, he said.

Encouraging Delay

The Bipartisan Budget Act of 2015 replaced a partner-by-partner audit system with a centralized audit approach that, in general, assesses and collects tax at the partnership level. The Internal Revenue Service and Department of Treasury are aiming to release all of the guidance implementing the new federal audit process by this summer, a counsel in the Treasury Department’s Office of Tax Policy said during another panel at the ABA meeting.

Nicely cited New York as a recent example of a state in which tax administrators and legislators are opting not to rush in and do something on audit regimes immediately. Officials said the state is “probably not going to try to push something this year,” he said.

“I think there was another state we reached out to, Oregon, that is going to hold off,” Nicely added. “Minnesota is a state that we’re working on, trying to get them to delay, but some states--like California--have said they do want to move forward.”

Broader Mission

COST’s interest in this issue isn’t limited to the partnership audit regime. The group also wants to improve the reporting process that C-corporations, and even individuals, have to use. COST wants to “address the big picture,” and changes to audit regimes make this a good time to do so, Nicely said.

“We want broad overall improvement with how the states deal with federal adjustments,” he said. “When you have a federal adjustment, and it has to be reported at the state level, a lot of the states do not have good administrative practices.”

COST is among several “interested parties” working with the Multistate Tax Commission on a model partnership audit statute that responds in part to the federal partnership regime. The other parties are the 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.

The interested parties proposed a model state law to promote uniformity when it comes to conformity with the federal regime and partnership audits. The draft model addresses both procedures for reporting federal income tax changes and procedures for reporting changes under the federal partnership audit regime.

To contact the reporter on this story: David McAfee in Los Angeles at dmcAfee@bloomberglaw.com

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

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