The Multistate Tax Commission adopted its proposed Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments.
The model statute was drafted in response to the Bipartisan Budget Act of 2015 changing the existing federal partnership audit provisions.
What was the MTC’s Goal in Drafting the Statute?
The statute was drafted by the MTC’s Partnership Project. The project set out to address the following questions:
- Were new state statutes called for?
- What more should the states be doing to audit and track partnership income?
- Are withholding statutes effective enough given multiple tiered entities, and how will old statutes intersect with entity-level liability?
What is the General Rule to Report Adjustment to Federal Taxable Income?
Generally, taxpayers have 180 days after the final determination date to report adjustment to federal taxable income. The taxpayer must file an adjustment report and pay any tax due. The rule applies to final federal adjustments:
- arising from an audit or other action by the IRS; or
- reported by the taxpayer on a timely filed amended federal income tax return.
This includes a return or report filed pursuant to IRC Sec. 6225(c)(2) or a federal claim for refund. The general rule does not apply to final federal adjustments reported using the procedures below or under IRC Sec. 6225(a)(2).
What is the Timeline for Reporting Partnership Level Audit and Administrative Adjustment Requests?
Partnerships have 90 days to report and make payments from a partnership level audit or an administrative adjustment request. Specifically, 90 days after the final determination date:
- the partnership must file a completed federal adjustments report;
- notify direct partners of their distributive share;
- file an amended composite return for direct partners and/or an amended withholding return for direct partners; and
- pay the additional amount that would have been due had the final federal adjustments been properly reported.
Direct partners have 180 days after the final determination to:
- file a federal adjustments report stating their distributive share of the adjustments reported to them; and
- pay any additional amount of tax due, penalty and interest, as if the final federal adjustments had been properly reported.
Can the Partnership Pay for Direct and Indirect Partners?
The partnership can make an election to pay for direct and indirect partners. In order to make the election, the partnership has 90 days after the final determination date to:
- file a completed federal adjustments report;
- provide the information required by the state; and
- notify the state that it is electing to pay.
The partnership then has 180 days, after the final determination date, to make payment. Instead of taxes owed by direct and indirect partners, the statute provides a method to calculate the proper amount to pay.
Tiered partners must make required reports and payments no later than 90 days after the time for filing and furnishing statements. The time for filing and furnishing statements to tiered partners is established under IRC Sec. 6226.
The statute provides for a state determined modified reporting and payment method.
What Other Items are Addressed in the Model Statute?
The model statute also provides for:
- establishment of a de minimis exception;
- statutes of limitations for assessments of additional tax;
- estimated payments during the course of a federal audit;
- claims for refund or credits; and
- extensions of time.
Where Can a Copy of the New Model Statute be Found?
The text of the model statute can be read on the MTC website at
Multistate Tax Commission, MTC Special Meeting, January 24, 2019