Qualities of a Fair State Tax Administration Part 4 – Adjustments to Federal Corporate Tax Liability

This is the fourth in a series of posts about the qualities of a fair state tax administration.  These measurements were used by the Council on State Taxation (COST) to analyze each state’s fairness in administering its taxes.  

Whenever a federal income tax return is changed, it can trigger changes on all state and local level returns that were filed in the years affected.  Many states are inconsistent with the time frame required to amend returns for such changes, requiring a much shorter deadline for amending returns due to federal changes as opposed to other amendments.  Also confusing is when the clock starts ticking on the timing.  Lastly, if the statute of limitations has already expired in that state, does the state reopen the return for issues beyond the scope of the federal changes?

When Does the Clock Start?
In most states, the requirement to report federal taxable income changes to the state is triggered upon final determination, such as when a Revenue Agent’s Report (RAR) is issued.  Some states have no definition, so the waters are murky, and chances of penalties and interest for late filing or late payment may occur.  The COST study suggests a definition primarily based on New Hampshire’s “final determination” statutory definition as follows:

“A ‘final determination’ is deemed to occur when the latest of any of the following activities occurs with respect to a federal taxable year:
1)    The taxpayer has made a payment of any additional income tax liability resulting from a federal audit, the taxpayer has not filed a petition for redetermination or claim for refund for the portions of the audit for which payment was made and the time in which to file such petition or claim has lapsed.
2)    The taxpayer has received a refund from the U.S. Treasury that resulted from a federal audit.
3)    The taxpayer has signed a federal Form 870-AD or other IRS form consenting to the deficiency or consenting to any over-assessment.
4)    The taxpayer’s time for filing a petition for redetermination with the U.S. Tax Court has expired.
5)    The taxpayer and the IRS enter into a closing agreement.
6)    A decision from the U.S. Tax Court, district court, court of appeals, Court of Claims, or Supreme Court becomes final.”

What Is the Deadline for Filing Amendments?
The deadline for filing amended state returns resulting from federal tax return changes currently ranges anywhere from 30 days to 2 years.  COST argues that a minimum 180 days to report IRS adjustments to the states is required to allow multijurisdictional taxpayers to have ample time to make the changes to multiple state returns.  Currently only 13 states allow this much time or more, with Oklahoma and Virginia receiving kudos for allowing one year or more to report such changes.

Is the Statute of Limitations Reopened for All Issues?
In some cases, amendments to state returns as a result of IRS redeterminations need to occur after the state’s statute of limitations has expired.  In these instances, does the state cause all issues for that period to be reopened (allowing potential for further tax or refund)?  In fairness to the taxpayer, once the statute has closed, only those issues that have changed resulting from the federal return should be reopened for adjustment.  Taxpayers shouldn’t have to be fearful that staying compliant with the law in filing amended returns resulting from IRS redeterminations will open a can of worms whose statute has expired.

How Can We Help? 
Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of multi-state and local tax compliance and consulting for large US and global corporations.  We use that experience to your advantage.  Contact us and we can provide a customized cost-effective solution to meet your company’s needs.  For further information on Allyn Tax services, please contact: tax@allynintl.com.