A new federal law and process for federal audits of partnerships will likely require states to amend their laws to ensure their tax agencies can administer state taxes in conjunction with the new federal regime. Without a model statute, there is potential for substantial variance across the nation as states consider legislation.
With the many state tax issues involved, the AICPA worked with several organizations over the past two years to develop a model state statute for reporting federal tax changes to the states, including the new partnership audit process. For a state to collect its share of liabilities flowing from an IRS partnership audit and not face substantial legal and administrative concerns, the state should adopt the model statute. IRS audits under the new federal regime will not begin until late 2019, and the first completed IRS audits are unlikely to occur until late 2020 or early 2021. States should have sufficient time to establish any necessary guidance or procedures before any audits are completed at the federal level under the new regime.
DRAFT STATE MODEL STATUTE
The state model statute is titled "Model Uniform Statute and Regulation for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments." The model statute was designed to provide states with a uniform, simplified method to apply the results of a partnership audit conducted by the IRS under the new federal procedures in effect for tax years beginning Jan. 1, 2018. The model statute provides uniformity and incorporates the changes needed for states to conform to the regime, and establishes more uniform standards for reporting federal audit adjustments for all taxpayers to the states. The model statute also addresses the changes made to federal audit procedures by the regime that affect state-specific issues, such as residency and apportionment.
Broad state adoption of the model statute will provide greater uniformity among the states and increased compliance, which will ensure states receive taxes owed quicker and with greater accuracy. The goal is to have fair, reasonable, and administrable state partnership audit rules that minimize the complexities and burdens for taxpayers, CPAs, and state tax authorities.
The model statute is designed to work irrespective of which options are selected by a partnership within the new federal process.
GUIDING PRINCIPLES AND ISSUES ADDRESSED IN THE MODEL STATUTE
The guiding principles behind the model statute, and the issues that state CPA societies should consider as they work with state legislatures and tax authorities, are:
- Allow a partnership the ability to make different elections under the regime for state purposes than the partnership makes for federal tax purposes.
- Base the apportionment and allocation of the federal adjustment on the apportionment and allocation factors of the reviewed year.
- Where the partnership elects to pay the tax, apply apportionment factors at the partnership level for all adjustments allocable to all partners except direct resident partners.
- For tiered structures, allow flexibility and options to each tier for reporting and payment elections that mirror the federal options.
- For administrative ease, offer partnerships the ability to use alternative reporting and payment solutions subject to state approval.
- Provide for a single partnership representative for all states regardless of the state of residence of the partnership representatives.
For a detailed discussion of the issues in this area, see "State & Local Taxes: A Uniform State Approach to the New Federal Partnership Audit Regime" in the December 2018 issue of The Tax Adviser.
— Eileen Reichenberg Sherr, CPA, CGMA
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
Also in the December issue:
- A discussion of reasonable cause and the accuracy-related penalty.
- An analysis of using R&D credits to reduce payroll taxes.
- A look at the top mistakes when claiming Social Security benefits.
AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section membership includes a one-year subscription to the The Tax Adviser.