TEI Issues Policy Statement Regarding the State Implementation of Federal Partnership Audit Rules.

Position:Tax Executives Institute

State and Local Tax Policy Statement Regarding State Implementation of the Federal Partnership Audit Rules

Tax Executives Institute maintains that consistency among state rules, as well as ease of reporting, is essential to the efficient implementation of the Bipartisan Budget Act of 2015's federal partnership audit rules at the state level.

Partnerships subject to partnership-level audits under the Bipartisan Budget Act of 2015 should have the right to appoint state partnership representative(s) that differ from the federal partnership representative and varies by State.

Imputed underpayments and overpayments arising from partnership level audits should be allocated among the partners as specified in the partnership agreement in effect for the reviewed year (1) and using the reviewed year's apportionment data, as adjusted.

Reporting partnership level audit adjustments to States shall be trigged by a final determination, which shall occur when all adjustments made by the IRS to the federal taxable income of the partnership have become final and all appeal rights under the IRC are exhausted or have been waived for the partnership's taxable year.

With the exception of composite return filers, the state partnership representative shall have the option to pay the tax at the partnership level or push out the state tax due, regardless of whether the partnership paid the tax or pushed out the tax at the federal level. Rights to overpaid taxes shall be claimed by the reviewed year's partners.

On June 13, 2017, TEI issued a new policy statement addressing state implementation of the federal partnership audit rules.

In 2015, Congress passed the Bipartisan Budget Act of 2015 (BBA), which adopted a new federal centralized partnership audit regime and is scheduled to become effective for taxable years beginning after December 31, 2017. Since its enactment, Congress has considered a technical corrections bill and Treasury released proposed regulations to provide taxpayers and the Internal Revenue Service (IRS) with guidance regarding the operation of the new federal partnership audit rules.

The new federal partnership rules, which allow the IRS to audit and assess partnerships at the partnership level, have important implications for the manner in which partnerships and their partners report federal adjustments and pay taxes to the States. The Multistate Tax Commission thus formed the Partnership Project to address whether new state statutes are needed...

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