A uniform state approach to the new federal partnership audit regime

By Eileen Reichenberg Sherr, CPA, CGMA

Editor: Catherine Stanton, CPA

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 their 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.

States are likely to consider this issue over the next year. State CPA societies are encouraged to work with their state legislatures and tax authorities on adopting the model statute, which is available at www.mtc.gov.

In December 2017, this column discussed the federal and state rules (see Jensen, Sherr, and Stanton, "Developing a Uniform State Approach to the New Federal Partnership Audit Regime," 48 The Tax Adviser 888 (December 2017). Now this column takes a look at the model statute.

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 it 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.

The model statute is a result of negotiations between the AICPA and various organizations with the Multistate Tax Commission (MTC) and many of the state departments of revenue on various drafts over the past two years.

Update on developments


On March 23, 2018, Congress approved a package of technical corrections to the regime as part of the Consolidated Appropriations Act, 2018.1 The changes enacted provided for a new "pull-in" procedure in lieu of partners filing amended returns, clarified that tiered partnerships may elect to use the "push-out" procedures, and included a number of revised definitions.

Over the past year, the IRS issued several regulations regarding partnership audits. First, the Treasury and the IRS, on Jan. 2, 2018, issued final regulations (T.D. 9829) on the opt-out election. Second, on Aug. 6, 2018, Treasury and the IRS issued final regulations on partnership representatives and the election to apply the regime (T.D. 9839). Finally, on Aug. 17, 2018, Treasury and the IRS published in the Federal Register updated proposed regulations that withdraw and repropose certain portions of previously issued proposed regulations implementing the centralized partnership audit regime that Treasury and the IRS had not yet finalized to reflect the changes made by the Consolidated Appropriations Act, 2018.2

Over the past few years, the AICPA submitted many comments to Congress and to the IRS on the proposed federal rules.3 Michael Greenwald, chair of the AICPA Partnership Taxation Technical Resource Panel, testified on behalf of the AICPA at the Oct. 9, 2018, IRS hearing on the proposed regulations issued in August 2018.4 Additional Treasury and IRS proposed guidance was expected later this year on several areas not yet addressed. Final Treasury and IRS regulations are expected in late 2018 or early 2019.

More details regarding the new federal regime and the AICPA comments on the proposed regulations are provided in an article published in The Tax Adviser (see Freeman, "A Glimpse Into the New Partnership Audit Rules," 47 The Tax Adviser 756 (October 2016); see also the AICPA Partnership Audit and Adjustment Rules webpage, available at www.aicpa.org.

In addition to the federal developments over the past year, the AICPA and other organizations (including the Master Limited Partnership Association (MLPA) as well as the groups mentioned in part 1 of this discussion in the December 2017 issue) have come to an agreement with the MTC (and obtained input from various state departments of revenue) on the model statute. In 2018, Georgia5 and California6 enacted legislation similar to the model statute. In 2018, Hawaii enacted legislation,7 but it did not follow the model statute, and Minnesota and Missouri considered, but did not enact, bills that did not follow the model statute.

The impact of the 2018 Hawaii legislation on partnerships subject to a federal audit is unclear, and it is likely that the state legislature will need to amend the statute.8 The 2018 Minnesota bill contained some significant differences from the model statute and was amended several times during the legislative session.9 Ultimately, the governor vetoed an omnibus tax bill containing the partnership audit provisions. The 2018 Missouri bill did not include any provisions from the model statute and was not considered further by the legislature.10

On July 24, 2018, the MTC's Uniformity Committee voted to move forward with the model statute. The MTC's Executive Committee held a public hearing on the model statute on Oct. 15. A report from that hearing is available at www.mtc.gov.

A number of state tax departments have indicated formally or informally that they anticipate waiting until the 2019 legislative session to pursue partnership audit conformity legislation. These states include Alabama, Indiana, Kentucky, Missouri, New York, and Oregon.

In September 2018, the AICPA updated a position paper (available at www.aicpa.org and one-pager (available at www.aicpa.org on this issue.

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, notably for the push-out or "pay-up" elections.11 However, it is recommended that the states require partnerships that elect out of the regime at the federal level also to opt out at the state level.
  • Base the apportionment and allocation of the federal adjustment on the apportionment and allocation factors of the reviewed year.12 Use the original apportionment and allocation factors of the reviewed year, adjusted for any federal audit changes. Determine the state-specific tax treatment of items based on the reviewed year apportionment factor.
  • For the pay-up election, 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. One partnership representative should apply for both federal and state purposes. The federal partnership representative may designate a state-specific partnership representative for each state.
Details of the model statute


As of Oct. 8, 2018, the model statute contains sections on the topics discussed below:

Definitions


Section A of the model statute includes the necessary definitions and references to the Internal Revenue Code for both the general revenue agent report (RAR) provisions and the regime-specific provisions. State CPA societies may want to work with their state's tax department to identify any existing provisions in state law or regulation that may conflict with these definitions and require modification.

According to the model statute, a"federal adjustment" is a change to an item or amount determined under the Code that a taxpayer uses to compute state tax owed. This change is regardless of whether it results from action by the IRS, including a partnership-level audit, or the filing of an amended federal return, federal refund claim, or an administrative adjustment request by the taxpayer. A federal adjustment is positive to the extent that it increases state taxable income as determined under state laws and is negative to the extent that it decreases state taxable income as determined under state laws.

The federal adjustments report is a method or form required by the state tax agency for a taxpayer to report final federal adjustments. It includes an amended state tax return, information return, or a uniform multistate report.

The final determination date is the date on which all adjustments made by the IRS to the federal taxable income of a taxpayer for the tax year have been finally determined (for the taxpayer or for the entire group if the taxpayer filed as a member of a combined/consolidated return/report under state law) and all appeal rights under the Code are exhausted or have been waived; or the day on which a federal amended return or similar report, federal refund claim, or federal administrative adjustment request, or other similar report is filed. The final determination date would streamline reporting by creating one final determination date for each tax year under audit, which eliminates the requirement for the taxpayer to file multiple amended returns.

A "final federal adjustment" is a federal adjustment after the final determination date for that federal adjustment has passed.

Reporting adjustments to federal taxable income: General rule


Section B of the model statute covers the procedure for reporting adjustments to a taxpayer's return other than those adjustments resulting from a partnership-level audit under the regime. It is intended to establish consistency among the states as to the timing and procedure for reporting changes resulting from IRS audits and taxpayer-prepared amended federal returns.

The taxpayer is required to report and pay any state tax due with respect to a final federal adjustment to a state within 180 days of the final determination date. However, it will not apply in the case when a partnership elects to pay, and for final federal adjustments required to be reported for federal purposes under Sec. 6225(a)(2).

Partnership-level audits and administrative adjustment requests


Section C of the model legislation contains the new procedures to allow states the ability to process adjustments from a federal audit conducted under the regime and collect the appropriate amount of tax regardless of the reporting and payment options selected by the partnership at the federal level.

Specifically, the model statute provides for the following recommended procedures:

Flexibility of elections

Certain elections are available under the regime that should also extend to the state level.

The model statute provides that the default method used to report the changes resulting from a federal partnership audit to the state is similar to the federal push-out method. Unlike the federal procedure, partners would file amended returns for the reviewed (i.e., audited) year. This default method is effectively the same as the prior procedure used following a TEFRA audit.

Notwithstanding this default rule, the model statute also provides that states allow partnerships to make a state-level election to pay state tax on the apportioned and allocated federal imputed underpayment at the partnership level (and report amounts paid to individual partners) or request a modified reporting and payment method for use, subject to approval by the state tax authority.

There are circumstances in which the state adjustments are much smaller than federal adjustments once the state apportionment factor is applied or state modifications are made to the federal adjustments. For ease of administration, the partnership and its partners may prefer to pay the state tax at the partnership level, as opposed to burdening the partners with having to file separate amended returns in each state. In some cases, the administrative costs for filing the amended returns would far exceed the amount of tax the state would collect from the partners; processing amended tax returns and collecting from all the partners increases the administrative costs and compliance burdens to the state taxing authorities.

In contrast to the general flexibility in allowing state-specific elections that are independent of the federal elections made with respect to the regime, the model statute envisions partnerships that elect out of the regime at the federal level not be subject to the provisions of this section of the model legislation because their partners will file amended returns at the federal level and thus have a requirement, under state law, to file amended state returns as well.

Apportionment and allocation factors

For consistency and to avoid any potential constitutional issues, the model statute provides that states base the apportionment and allocation of the federal adjustment on the apportionment and allocation factors and rules that apply in the reviewed year. States should use the original apportionment and allocation factors of the reviewed year, adjusted for any effects resulting from federal audit changes. The states should determine the state-specific tax treatment of items based on the reviewed year apportionment factor.

Tiered structures

The model statute provides that states allow any upper-tier partnerships in a tiered ownership structure to make a state-level election to use the pay-up election in the same manner as the audited partnership.

Under the federal regime, as modified by the technical corrections enacted in 2018, all partners and partnerships in a tiered ownership structure must report and pay the additional tax due by the extended due date of the audited partnership's adjustment year. For example, if the IRS completes an audit and issues a final notice on July 1, 2021, the adjustment year is 2021, and the extended due date is Sept. 15, 2022. Under the model statute, partners and partnerships in a tiered ownership structure must report and pay the additional tax due to the states no later than 90 days after the federal date — in the example, this date is Dec. 15, 2022. States are permitted to establish interim deadlines for each tier if desired.

Partnership representative

The model statute provides that states should recognize for state purposes a partnership's selection at the federal level of a partnership representative.

Having a single individual responsible for all decisions relating to the audit, whether federal or state related, will provide certainty and simplicity to the process.

In addition, the model statute would allow the federal partnership representative to designate a state-specific partnership representative for each state to act in the place of the federal partnership representative for that state. The federal partnership representative would coordinate all the state-specific partnership representative designations.

90 days for filing, notification, etc.

The model statute provides that unless a partnership pays election (see below) is made, the general rule is that within 90 days of the partnership's final determination date, the partnership must:

  • File a completed federal adjustments report with the state;
  • Notify each of its direct partners of their distributive share of the final federal adjustment; and
  • 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 reported properly as required.

180 days for direct partners to report distributive share and pay tax due

The model statute also provides that within 180 days after the final determination date, each direct partner that is taxed in the state must file a federal adjustments report for its distributive share of the adjustments reported to the direct partner and pay any additional amount of tax due as if the final federal adjustments had been properly reported, plus any penalty and interest due and less any credit for related amounts paid or withheld and remitted on behalf of the direct partner.

Partnership pays election

The model statute allows a partnership to elect to pay an amount in lieu of the taxes owed by the partners. A partnership making this "partnership pays" election must:

  • No later than 90 days after the final determination date, file a completed federal adjustments report with the state tax agency and notify the state tax agency that it is making the election; and
  • No later than 180 days after the final determination date, pay an amount, determined as described in the model statute, in lieu of taxes owed by its direct and indirect partners.

The partnership payment amount includes amounts determined for direct corporate partners subject to tax under the state law, nonresident direct partners subject to tax in the state, tiered partners, and resident direct partners, along with penalty and interest as provided in state law.

The payment amount excludes from the final federal adjustments the distributive share of these adjustments reported to a direct exempt partner not subject to tax in the state.

For the total distributive shares of the remaining final federal adjustments reported to direct corporate partners subject to tax under the state law and to direct exempt partners subject to tax in the state, the adjustments are apportioned and allocated under existing multistate business activity allocation and apportion law, and the resulting amount is then multiplied by the highest corporate tax rate in the state.

For the total distributive shares of the remaining final federal adjustments reported to nonresident direct partners subject to tax in the state, the partnership determines the amount of the adjustments that is state-source income under existing nonresident partner sourcing law, and the resulting amount is multiplied by the highest tax rate under the state law applying to individuals and/or trusts.

For the total distributive shares of the remaining final federal adjustments reported to tiered partners, the partnership determines the amount of those adjustments that is of a type that it would be subject to sourcing to the state under existing state rules for allocating/apportioning income of nonresident partners, and then determines the portion of this amount that would be sourced to the state applying these rules. The partnership then determines the amount of those adjustments that is of a type that it would not be subject to sourcing to the state by a nonresident partner under existing state rules for income fully sourced based on a taxpayer's residency.

The partnership also determines the portion of the amount determined as sourced to the state by a nonresident partner that can be established to be properly allocable to nonresident indirect partners or other partners not subject to tax on the adjustments or that can be excluded under procedures in the model statute for the modified reporting and payment method. Then, the total of the amounts determined as sourced to the state and not sourced to the state by a nonresident partner is reduced by the amount determined as allocable to nonresident indirect partners or other partners not subject to tax on the adjustments, and that resulting amount is multiplied by the highest tax rate under state law applying to individuals and/or trusts.

For the total distributive shares of the remaining final federal adjustments reported to resident direct partners subject to tax under the state law applying to individuals and/or trusts, the partnership multiplies that amount by the highest tax rate under state law applying to individuals and/or a trust.

The model statute provides that the final federal adjustments subject to the partnership pays election would exclude any final federal adjustments resulting from an administrative adjustment request and exclude the distributive share of final audit adjustments that under state law must be included in the unitary business income of any direct or indirect corporate partner.

The model statute contains two optional provisions, including a provision that an audited partnership not otherwise subject to any reporting or payment obligation to a state that makes the partnership pays election consents to be subject to state laws related to reporting, assessment, payment, and collection of state tax calculated under the election. On the other hand, the state could include an optional provision that an audited partnership not otherwise subject to any reporting or payment obligation to the state may not make a partnership pays election.

The model statute also provides that the direct and indirect partners of an audited partnership that are tiered partners and all of the partners of those tiered partners that are subject to tax under state laws imposing tax on individuals, trusts, corporations, etc. are subject to the reporting and payment requirements of the model statute and are required to make reports and payments no later than 90 days after the time for filing and furnishing IRS required statements to tiered partners and their partners. Tiered partners are entitled to make the partnership pays and modified reporting and payment elections. The state agency may promulgate regulations to establish procedures and interim time periods for the reports and payments required by tiered partners and their partners and for making the partnership pays and modified reporting and payment elections.

Modified reporting and payment method

The model statute provides a modified reporting and payment method that states may adopt to allow an audited partnership or tiered partner to enter into an agreement with the state agency to use an alternative reporting and payment method, including applicable time requirements if the audited partnership or tiered partner demonstrates that the requested method will reasonably provide for the reporting and payment of taxes, penalties, and interest due under the provisions of the model statute. Application for approval of an alternative reporting and payment method must be made by the audited partnership or tiered partner within the time for election as provided in the model statute as appropriate.

Effect of election by audited partnership or tiered partner

The model statute provides that the partnership pays and the modified reporting and payment method elections are irrevocable unless the state agency determines otherwise. If properly reported and paid by the audited partnership or tiered partner, the amount determined in the partnership pays election or the modified reporting and payment election will be treated as paid in lieu of taxes owed by its direct and indirect partners, to the extent applicable, on the same final federal adjustments.

The direct partners or indirect partners may not take any deduction or credit for this amount or claim a refund of the amount in this state. Nothing in the model statute precludes a direct resident partner from claiming a credit against taxes paid to the state under its law, for any amounts paid by the audited partnership or tiered partner on the resident partner's behalf to another state or local tax jurisdiction in accordance with the provisions of state law or regulation allowing credit for taxes paid to another state or locality.

Failure of audited partnership or tiered partner to report or pay

Nothing in the model statute prevents the state agency from assessing direct partners or indirect partners for taxes they owe, using the best information available, in the event that a partnership or tiered partner fails to timely make any report or payment required by the model statute for any reason.

Other issues


These remaining sections of the model statute contain provisions covering a de minimis exception, statutes of limitation on assessments and refund claims, estimated payment procedures, and an effective date clause. All or most of these provisions already exist in many states' current tax statutes in some form. The authors recommend that states consider adopting these items or modifying their existing provisions to further the goals of uniformity, which helps ease administrative burdens and costs for both taxpayers and state tax departments.

De minimis exception

The model statute provides that a state agency may promulgate regulations to establish a de minimis amount upon which a taxpayer shall not be required to comply with the notification, reporting, and payment requirements in the model statute.

Statutes of limitation

A state agency may issue an assessment within the later of: one year following the filing date with the state of the federal adjustments report, or the expiration of the general limitation period where a taxpayer timely files a federal adjustments report.

Otherwise, (e.g., if the taxpayer fails to file the federal adjustments report within the period specified in the model statute, or the federal adjustments report filed by the taxpayer omits final federal adjustments or understates the correct amount of tax owed), the state agency may assess amounts or additional amounts including in-lieu-of amounts, taxes, interest, and penalties arising from the final federal adjustments, if it mails a notice of the assessment to the taxpayer by the latest of the following statutes of limitation:

  • The expiration of the state's general limitation period;
  • One year following the date the federal adjustments report was filed; or
  • Six years following the final determination date, absent fraud.

Estimated state tax payments during a federal audit

The model statute allows a taxpayer to make estimated payments to the state agency prior to the due date of the federal adjustments report, such as during a pending IRS audit, where a taxpayer has not yet obtained a final determination, to stop the running of interest to the taxpayer. The estimated tax payments will be credited against any tax liability ultimately found to be due to the state.

It allows estimated payments without the taxpayer's having to file the federal adjustments report or amended or pro forma amended tax returns. If the estimated tax payments exceed the final tax liability and statutory interest is ultimately determined to be due, the model statute provides that the taxpayer is entitled to a refund or credit of the excess, provided the taxpayer files a federal adjustments report or claim for refund or credit of tax no later than one year following the final determination date.

Claims for refund or credits of state tax arising from final federal adjustments

The model statute clarifies that the period in which a taxpayer may file a state claim for refund or credit of state tax is the later of one year from the date required for filing the federal adjustments report with the state agency under the model statute (including any extensions) or the expiration for filing a claim or credit (including any extensions). The model statute also clarifies that a federal adjustments report will serve as a taxpayer's claim for refund or credit of tax and as the means for the taxpayer to report additional state tax due, and make other adjustments (including to its net operating losses) resulting from adjustments to the taxpayer's federal taxable income.

Scope of adjustments and extensions of time

Unless a taxpayer and state taxing agency otherwise agree in writing, state adjustments made by the state agency or the taxpayer after the state's normal statutes of limitation for assessment and refund have expired are limited to changes to the taxpayer's tax liability arising from the adjustments made by the IRS. The taxpayer and the state taxing agency may agree in writing to extend the period for assessments of additional tax arising from adjustments to federal taxable income, and for filing a claim for refunds or credit of tax. An audited partnership or tiered partner that has 10,000 or more direct partners would receive an automatic 60-day extension upon written notice to the state agency.

Effective date

States should provide a clear effective date for when the changes apply. The amendments in the model statute apply to any adjustments to a taxpayer's federal taxable income with a final determination date occurring on or after a date specified in the state's statute. A prospective effective date is encouraged.

What practitioners and state CPA societies should do now


The federal changes are expected to dramatically increase the audit rates for partnerships. The new federal procedures extensively revised the prior federal audit process and will now have as the default the assessment and collection of tax at the partnership level unless certain elections and information filings are met. Partners should review and consider possible revisions to their partnership operating agreements. Now that the federal issues have started to be clarified further in regulations and will soon be finalized, the issues at the state level will need to be addressed.

Practitioners should review the IRS's guidance and the AICPA position paper.

Practitioners may want to work with their state CPA society to work on the state tax issues, undertake a process to identify state-specific areas that the regime will impact, develop potential options to address them, and encourage adoption of the state model statute.

State CPA societies may want to reach out to their state tax authority and begin a dialogue on what state-specific concerns the state may need to address. One of these considerations is that each state must decide whether it will (1) conform to the regime; (2) partially adopt the new provisions, or (3) determine the consequences of not adopting them. The laws of many states do not allow for the direct assessment of partnerships as these entities are not taxpayers upon which the state may assess, collect, or levy a tax. In other states, the partnership itself is the taxpayer, and individual assessment is not permitted as the state may not subject individuals to state income taxes. Therefore, many states will need to enact legislation in this area, and state tax authorities will need to issue guidance to explain how the states will implement any changes.

A major issue to address is whether the additional tax resulting from the audit adjustment and paid by the partnership is treated as a partnership-level tax or a partner-level tax paid on behalf of the partners by the partnership. Taxpayers and state tax administrators will need to address the corresponding impact on basis computations, as well as the ability of the individuals to claim credits for taxes paid to other states against their personal resident income tax obligations.

Each state will need to address the application of other state-specific income tax issues to partnerships and their partners, particularly the effect of apportionment and allocation. If a state conforms to the regime, and, thus, the state requires the assessment, levy, and collection of a state imputed underpayment at the partnership level, presumably the state will need a mechanism to determine what portion of that tax is attributable to the state. States typically use a system of allocation and apportionment to arrive at this result.13 If a state permits partnerships to push out the partnership audit adjustments to their reviewed year partners, similar issues exist. In most instances, the allocation and apportionment of the audited partnership would determine the portion of the adjustment sourced to the state.

In some situations, however, partners are required to include their unapportioned share of partnership income or loss in pre-apportionment taxable income, and their shares of the partnership's apportionment attributes in their partner-level apportionment calculations. This situation typically occurs when a corporate partner owns a controlling interest in a partnership and operates as part of a unitary business with the partnership. These issues can become especially confusing in complex, multitiered partnership structures. States will need to provide detailed guidance to taxpayers and their advisers and specify a clear path to compliance.

The AICPA has developed a position paper (available at www.aicpa.org and is available as a resource to state CPA societies as they assist state authorities to develop new state partnership audit rules.

In addition, because the new federal rules generally apply to partnership returns filed after 2018, careful planning starting today will help mitigate any unfavorable consequences resulting from these changes. The AICPA has created a Partnership Audit and Adjustment Rules resources page (available at www.aicpa.org to help practitioners discuss these changes with their clients and avoid any unintended consequences that might occur under the new process. One tool available to Tax Section members is a draft client letter template (available at www.aicpa.org; Tax Section member login is required) on the new partnership audit changes. The AICPA will continue to update members regarding developments and resources on partnership audits.  

Footnotes

1Consolidated Appropriations Act, 2018, P.L. 115-141.

2The new updated proposed regulations (REG-136118-15, REG-119337-17, REG-118067-17, REG-120232-17, and REG-120233-17) affect partnerships with respect to partnership tax years beginning after Dec. 31, 2017, as well as partnerships that make the election under the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, to apply the centralized partnership audit regime to partnership tax years beginning on or after Nov. 2, 2015, and before Jan. 1, 2018. The new updated proposed regulations replace the Dec. 19, 2017, proposed regulations (REG-120232-17 and REG-120233-17), which covered much of the details for the federal push-out election, including rules for applying it to tiered partnership structures. The new updated proposed regulations also replace the previously issued proposed regulations on general rules and procedures (REG-136118-15) (published in the Federal Register on June 14, 2017), affected international tax provisions (REG-119337-17), and the treatment of certain tax attributes under the new regime (REG-118067-17).

3On Oct. 7, 2016, the AICPA submitted to the Treasury Department and the IRS comments (available at www.aicpa.org on the proposed rules for the new regime. In addition, on Nov. 17, 2016, the AICPA submitted to Congress recommended legislative changes (available at www.aicpa.org to the new regime enacted as part of the BBA. On Jan. 4, 2018, the AICPA submitted to Congress a request (available at www.aicpa.org to delay for a year the BBA partnership audits regime due to the remaining uncertainties and lack of final guidance. On May 16, 2018, the AICPA submitted to the Treasury Department and the IRS comments (available at www.aicpa.org on the proposed regulations (REG-118067-17) regarding adjusting tax attributes. On Aug. 14, 2017, the AICPA submitted to the Treasury Department and the IRS comments (available at www.aicpa.org on the general rules and procedures proposed regulations (REG-136118-15). On Sept. 18, 2017, the AICPA testified at an IRS hearing on the general rules and procedures proposed regulations.

4A transcript of the testimony is available at www.aicpa.org; the AICPA's written statement is available at www.aicpa.org.

5The Georgia legislation, H.B. 849, was signed into law by Gov. Nathan Deal on May 3, 2018. It generally follows the model statute.

6In California, S.B. 274 was introduced on Feb. 9, 2018, and was subsequently amended several times. It passed the California legislature on Aug. 31, 2018, and was signed by Gov. Jerry Brown on Sept. 23, 2018. The current version follows the model statute, although the default reporting method in the California bill requires a partnership to follow the reporting and payment methodology used at the federal level, while the model statute requires the partners to report and pay any additional state tax on an amended return. However, the California bill, similar to the model statute, allows for a separate state election.

7Hawaii S.B. 2821, enacted June 13, 2018.

8The Hawaii statute conforms to many of the Internal Revenue Code provisions on the new regime, creating an audit procedure similar to the federal regime for state audits of state tax returns. However, the bill does not appear to address what the state will do following the completion of a federal audit of a partnership.

9See Minnesota H.F. 3411, which was introduced on March 8, 2018.

10See Missouri S.B. 897, which was introduced on Jan. 10, 2018.

11For federal purposes, if a partnership has not opted out of the regime, the new federal rules provide for a default approach for the IRS to assess any adjustments at the entity level for a partnership that is audited. The amount owed by the partnership is referred to as the "imputed underpayment" under Sec. 6225 and is calculated by applying the highest tax rate under Sec. 1 or 11 of the Code (currently 37%). A federal election is also provided under Sec. 6226(a) to "push out" the responsibility to the partners for payment of the partnership tax assessment. This federal election would require partners to make payments based on their pro rata allocation of the audit adjustments. Upon the IRS providing a partnership with a final audit adjustment, a partnership making a push-out election must inform the partners who were partners in the reviewed year of the final audit adjustment. For more details regarding the new federal regime (and the AICPA comments on the proposed regulations), see Freeman, "A Glimpse Into the New Partnership Audit Rules," 47 The Tax Adviser 756 (October 2016).

12The tax years audited by the IRS are commonly referred to as the "reviewed years," and the year in which the audit adjustments are taken into income is commonly referred to as the "adjustment year." This same nomenclature is followed in this column.

13Both Arizona S.B. 1288 and Montana H.B. No. 47 require the use of apportionment for determining the portion of the state imputed underpayment attributable to the state.

 

Contributors

Eileen Reichenberg Sherr, CPA, CGMA, is an AICPA senior manager of Tax Policy & Advocacy in Washington. Catherine Stanton, CPA, is a partner and the National Leader of State & Local Tax (SALT) Services with Cherry Bekaert LLP in Vienna, Va. Ms. Stanton is the chair of the AICPA State & Local Tax Technical Resource Panel. For more information about this column, contact thetaxadviser@aicpa.org.

 

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