Georgia Adopts Partnership Audit Procedure Regulations Similar to the New IRS Rules

Georgia has adopted regulations to provide further guidance on last year’s legislation establishing partnership audit rules similar to those enacted by the IRS.

Starting with tax years that begin in 2018, the IRS adopted a new approach for managing audits of partnerships and their partners. Under the new rules, partnership-level adjustments are made at the partnership level and any adjustments to tax, interest and penalties apply in the year that such adjustment is finally determined.[1] This results in the current partners becoming indirectly responsible for any audit liability instead of the actual partners from the audited year, although some entities may be eligible to file an annual election to opt out of these rules.

Last year, Georgia passed and signed into law HB 849,[2] which amended state tax law to conform Georgia’s audit procedures to the new IRS partnership audit approach. However, rather than requiring adjustments be paid by the partnership on behalf of its partners by default like the IRS model, Georgia law instead allows partnerships to elect to be treated in this manner. This law now permits partnerships that undergo a Georgia income tax audit resulting in an assessment, as well as those that receive IRS partnership income tax audit adjustments, to make an irrevocable election to pay the tax, penalty and interest due for all of its partners at the partnership level.[3] Should the audited partnership not make this election, its direct and indirect partners who are also partnerships may instead make the election.

In January, the Georgia Department of Revenue adopted Regulation 560-7-3-.11, which includes guidance on how to file this election, what information to report, and additional rules with respect to the payment of Georgia tax resulting from a partnership audit.

Applicability to State Audits

With respect to a state income tax audit, the election may be made on the original Georgia tax filing, an amended tax filing, or by providing a written statement at the time of the audit. These state audit rules apply to partnerships as well as other pass-through entities, such as S-corporations.  Eligible entities that make this election and pay the tax on behalf of their partners will not be required to file an amended income tax return at the end of the state audit.

Applicability to Adjustments from Federal Tax Audits

With respect to adjustments resulting from a federal income tax audit, a partnership is required to amend its Georgia partnership return to report the additional taxable income. On this amended return, the partnership will check a box to make the election (it is not yet clear where this will appear on the forms) and must include information related to the audit adjustment and its impact to the partnership and partners.

A partnership must make the election and satisfy the documentation and payment requirements within 90 days of the final determination date of the audit. This is generally the first date on which no federal adjustments arising from that audit remain to be determined, whether by agreement or by a final decision under which all rights of appeal have been waived or exhausted.

In the event the audited partnership does not make the election, a direct partner that is itself a pass-through entity that wishes to make the election must do so within 180 days of the final determination date of the audit. Indirect partners that are pass-through entities and that wish to make the election must do so within 90 days from the date on which the IRS requires that such indirect partners be informed of the adjustments.

When making the election, Georgia requires the partnership to attach a substantial amount of information about the adjustments. This includes:

  • Details of the federal adjustment and reallocation adjustments that increase Georgia taxable income;
  • Any modifications to the federal adjustment and reallocation adjustments required under Georgia tax law;
  • The resulting final federal adjustment and reallocation adjustments after any required Georgia modifications;
  • The amount of income allocated to and outside of Georgia and the Georgia apportionment ratio;
  • The additional resulting Georgia taxable income pursuant to the adjustments; and
  • Each partner’s name, tax ID, address, entity type/tax classification and distributive share of the above listed items.[4]

This information must also be provided to the partners, along with the amount of Georgia income tax paid on their behalf by the partnership with a notation that the partner may not claim such amount on a Georgia return.

Calculation of Tax Due

The regulations go on to provide additional guidance with respect to the tax liability to be paid by an electing partnership:

  • Certain Georgia tax credits that are eligible to be directly transferred or sold may be used to offset the tax to the extent the partnership has not passed them through to its partners. This would include Historic Rehabilitation Credits (121 & 135), Film Credits (122 & 133), Land Conservation Credits (124), and Postproduction Credits (138 & 139).
  • No net operating losses of any type are eligible to reduce the total additional Georgia taxable income to be paid.
  • Only tax payments made by the partnership that have not been passed through and made available to the partners may be used to pay the tax. This generally means that no previously reported nonresident withholding taxes can be used.
  • When the election is made and the partnership pays tax on behalf of its partners, the partners must exclude their share of the increased income resulting from the audit from any subsequent amended returns they may file.

The new Georgia partnership audit rules are effective for Georgia audits for income tax years beginning in 2017 (unless an earlier period is agreed to by the Commissioner and the pass-through entity) and for adjustments related to federal tax audits for years beginning in 2018. While this law undoubtedly helps the Department of Revenue by preventing the state from having to audit partnerships on a partner-by-partner basis, some affected partnerships will likely welcome the option to pay Georgia tax at one level rather than deal with the fallout of an audit at multiple levels of ownership.

Aprio’s State & Local Tax Practice has experience in navigating multi-state issues for pass-through entities and can assist taxpayers under audit by any state. We continue to monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the February 2019 SALT Newsletter.

[1] IRC Sec. 6221(a).  For example, assume that a partnership is audited for tax year 2019 and that the audit results in an underpayment assessed in 2021.  Any tax, interest, and penalty paid will be reported for the 2021 tax year.  If instead the partnership litigates that assessment in tax court, and the decision becomes final in 2023, the adjustment year is 2023.  It is important to note that these rules apply even though some partners may have left or joined the partnership in the interim.

[2] GA L. 2018, Act 381 (HB 849)

[3] OCGA §48-7-53(c)(3)

[4] These requirements vary for partners who are exempt entities or fiduciaries.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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