Florida corporate income tax: reporting of federal audit adjustments.

• Author: Jablow, Benjamin A.
• Position: Tax Law

The Florida Corporate Income Tax (FCIT) adopts the Internal Revenue Code (1) as the starting point to compute Florida taxable income. (2) If an Internal Revenue Service (IRS) audit results in adjustments to items that would change the computation of a taxpayer's Florida taxable income, following the conclusion of the federal audit, (3) the Florida taxpayer is generally required to file an amended FCIT return to report the IRS redetermination of its federal income pursuant to F.S. [section]220.23(2). This article discusses the recommended procedures that a Florida taxpayer should follow to meet the filing requirements provided in F.S. [section]220.23(2) following an IRS audit.

The general statute of limitation for the assessment of tax applicable to the FCIT is provided in F.S. [section]95.091(3). The statute provides that the Florida Department of Revenue (FDOR) may assess any additional FCIT due within three years "after the date the tax is due, any return with respect to the tax is due, or such return is filed, whichever occurs later." (4) Generally, a Florida taxpayer is required to file a refund claim for FCIT within three years after the right to the refund has accrued under F.S. [section]215.26(2). (5) A Florida taxpayer would be required to file a refund claim within three years of the due date for the FCIT return, including valid extensions. (6) These two limitation periods are modified for amended FCIT returns required as a result of federal audit changes pursuant to F.S. [section]220.23(2).

Filing Requirements as the Result of Federal Audit Changes

F.S. [section]220.23(2) provides that under most circumstances a Florida taxpayer is required to file an amended FCIT return (FDOR Form F-1120X) with the FDOR within "60 days after such adjustment has been agreed to or finally determined for federal income tax purposes" to report any redeterminations of federal income. A Florida taxpayer is not required to file an amended return in cases when 1) the federal change is limited to a carryback of a net operating loss or a capital loss or 2) the only effect is to increase or decrease a net operating loss. (7) The amended FCIT return is limited to the federal items that were adjusted by the IRS. (8) If the federal redetermination results in an increase to federal taxable income, then the Florida taxpayer will generally be required to file an amended FCIT return reporting additional tax due, as well as interest computed from the original due date of the return until paid to the FDOR. (9) If the federal redetermination results in a decrease to federal taxable income, then the Florida taxpayer will generally be entitled to a refund of tax previously paid to the FDOR. (10)

For example, assume that the IRS determined that a taxpayer was required to increase its federal taxable income in the amount of $1,000,000 due to a disallowance of meals and entertainment expenses and the Florida taxpayer's original return reported a 10 percent Florida apportionment factor. Assuming no other items are required to be considered in the recomputation of Florida tax, the taxpayer would be required to file an amended FCIT return and pay an additional $5,50011 of FCIT, plus interest. In a second example, assume the same facts as above, except that instead of a $1,000,000 increase to taxable income, the IRS determined that the taxpayer was entitled to increased meals and entertainment expenses of $500,000. In this second example, the Florida taxpayer would be entitled to a refund of $2,750. (12)

In the event that an amended FCIT return is required to be filed to report federal changes pursuant to F.S. [section]220.23(2), the amended return must be filed with the FDOR within "60 days after such adjustment has been agreed to or finally determined for federal income tax purposes, or after any federal income tax deficiency or refund, abatement, or credit resulting therefrom has been assessed, paid, or collected, whichever shall first occur." (13) However, a payment of disputed federal tax amounts when necessary to contest a federal assessment in court does not constitute tax "paid" for the purpose of the 60-day filing requirement under F.S. 220.23(2)(a)3. (14) There may be situations when the IRS and taxpayer agree to some items of redetermination and disagree with others. In this situation, the Florida taxpayer would be required to file an amended FCIT return within 60 days of the agreed changes. (15) As the remaining issues are agreed to or finally determined, additional amended FCIT returns are required to be filed within 60 days of the agreement or final determination. (16)

For example, assume that the IRS audited a Florida taxpayer for the tax year ending December 31, 2010, and proposed to disallow the following items: (a) $500,000 in interest expense deductions; (b) $300,000 in depreciation deductions; and (c) $15,000,000 in operating expense deductions. Further, assume that the Florida taxpayer agreed with items (a) and (b) and the IRS and taxpayer executed a written agreement for items (a) and (b) on January 30, 2014. (17) Finally, assume that the Florida taxpayer paid the tax relating...