Is Your Federal Income Tax Return Being Adjusted? If So, Don’t Forget Your State Income Taxes

By: Jeff Glickman, SALT Partner

At a glance

• The main takeaway: If your federal income tax return is currently being reviewed by or you are engaged in settlement negotiations with the IRS, you may have obligations to report any changes to the states. 
• Assess the impact: Businesses must be aware that each state’s federal tax adjustment program requirements and processes are different, as well as the impact such adjustment may have on any multistate tax filing positions.
• Take the next step: Aprio’s State and Local Tax (SALT) team can model potential state tax outcomes and review your multistate tax filing positions to reduce your state tax exposure.

Schedule a free consultation today to learn more!

The full story

Is your federal income tax return currently being reviewed by the Internal Revenue Service (IRS)?  Are you engaged in settlement negotiations with the IRS on a particular set of issues? If so, and if you expect that the end result will be an increase to your taxable income, you should be considering the potential impact to your state income tax returns and your options for addressing the federal adjustment.

Time period for reporting a federal adjustment

Generally, each state has rules that address a taxpayer’s responsibility to report a change to a federal income tax return that will result in additional tax owed to the state.[1] For example, in Georgia, when the amount of net income reported to the IRS is changed or corrected, the taxpayer has 180 days after the “final determination date” of such change or correction to file an amended Georgia return reporting the adjusted net income amount.[2] The “final determination date” is typically the date on which no changes or corrections remain to be finally determined. In the case of a settlement, that will typically be the date the settlement agreement is signed by the last party, and in the case of a contest or appeal, the date of a final decision with respect to which any rights of appeal have been waived or exhausted.[3]

Other states may have different time periods for reporting a federal change. New York typically requires a report of a federal change to be made within 90 days of a final determination.[4]

Statute of limitations for states to assess a federal adjustment

Compliance with the state reporting requirements above can also have an impact on the applicable statute of limitations period with respect to the federal adjustment. For taxpayers that timely file an amended return reporting the federal adjustment, the state has one year to issue an assessment based on the adjustment. However, if an amended return is not filed, the state has the right to make an assessment up to five years from the date it actually receives a report from the IRS regarding such adjustment.[5]

As illustrated by the rules for reporting a federal adjustment, taxpayers cannot ignore their state tax obligations in these situations in the hope that the state will never find out and that the matter will just go away.

Taxpayer considerations

As you work through the audit or settlement process with the IRS, it’s important to start considering the impact these potential adjustments may have on your multistate tax filing positions. Two areas to pay specific attention to are:

• Nexus – If the potential IRS adjustment will result in an increase in your gross receipts or other items of income, consider whether those increases, depending on their state sourcing, may cause you to exceed state bright-line factor presence nexus thresholds.
• Apportionment – IRS adjustments, such as increases to income or a denial of a deduction like the dividend received deduction, may impact the calculation of your state apportionment factors, most likely the sales/receipts factor. An analysis should be performed to determine how any IRS adjustment may cause a recalculation of your state sales factor.

During the audit or settlement process, prior to a “final determination,” you should also consider whether to voluntarily resolve your state income tax liabilities through a state voluntary disclosure program. These programs can offer limited lookback periods and penalty waivers.  However, each state’s program requirements and process are different, so it is important to consult with your state tax advisor.

The bottom line

Aprio’s SALT team has experience with the state requirements related to federal tax adjustments.  We can help you model the potential state tax outcome and review your multistate tax filing positions to determine if there are ways to reduce any potential state tax exposure. We can also assist with determining if you should participate in a state voluntary disclosure program and can pursue these on your behalf to achieve a favorable outcome. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter. 

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[1] While this article will focus on federal adjustments that increase state income tax liability, should such adjustments actually reduce state income tax liability, refund opportunities should be pursued.
[2] O.C.G.A. § 48-7-82(e)(1).  Note that for adjustments impacting a partnership return, Georgia has specific rules and procedures for partnerships (see O.C.G.A. § 48-7-53) that were enacted in response to the new federal partnership audit process enacted as part of the Bipartisan Budget Act of 2015.  Other states may have enacted similar rules for partnerships.
[3] O.C.G.A. § 48-7-82(e)(1)(A).
[4] N.Y. Tax Law § 659.
[5] O.C.G.A. § 48-7-82(e)(1).