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S.F. No. 1522 - Partnership audit reporting and payment requirements
 
Author: Senator Ann H. Rest
 
Prepared By: Nora Pollock, Senate Counsel (651/297-8066)
 
Date: March 12, 2019



 

This bill establishes reporting and payment requirements for partnerships whose returns have been adjusted at the federal level. The provisions in the bill are in response to federal changes to partnership audit rules recently enacted in the Internal Revenue Code for the IRS to audit, assess, and collect a determined underpayment directly from a partnership at the entity level, rather than auditing the partnership and assessing and collecting from each individual partner. The bill is effective for federal adjustments that have a final determination after June 30, 2019.

Article 1 – Partnership Tax; Policy Changes

Section 1 provides definitions used in the new provisions.

Section 2 establishes a general rule for reporting federal adjustments. Taxpayers must:

  • file a federal adjustment report with the commissioner reporting all final federal adjustments made by the IRS within 180 days of the final determination date made by the IRS;
  • file a federal adjustment report with the commissioner reporting any federal adjustments the taxpayer reported to the IRS; and
  • for a final federal adjustment arising from a partnership-level audit or an administrative request filed by a partnership, report adjustments as required under section 3.

Section 3 establishes reporting and payment requirements.

              Subd. 1 provides that the state partnership representative has sole authority to act on behalf of the partnership for the applicable year, and that direct and indirect partners are bound by those actions. The state partnership representative is the partnership’s federal representative unless otherwise provided in a notification to the commissioner.

              Subd. 2 establishes reporting and payment requirements for partnerships and tiered partners that have final federal adjustments and do not elect to pay their assessed liability at the entity level under subd. 3.

              Subd. 3 allows an audited partnership to elect to pay its assessment at the entity level, provided that it files within specified time limits a completed federal adjustment report, including residency information for all individual direct partners, and other information prescribed by the commissioner; and pay a specified amount in lieu of taxes on partners. An audited partnership may not make an election to report a federal adjustment that results in unitary business income to a corporate partner required to file as a member of a combined report, or to report any final federal adjustments resulting for an administrative adjustment request.

              Subd. 4 requires that direct and indirect partners of an audited partnership that are tiered partners, and all partners of the tiered partners that are subject to income tax, are subject to the reporting requirements under subd. 2. Tiered partners may make the election under subd. 3.

              Subd. 5 provides that the election under subd. 3 is irrevocable unless otherwise determined by the commissioner. Amounts of property reported and paid by audited partnerships or tiered partners are treated in lieu of taxes owed by direct partners on the same federal adjustments. Direct and indirect partners who are not resident partners are not allowed a credit, deduction, or refund for this amount. Resident partners may claim a credit against income taxes paid by the audited partnership or tiered partners on the resident partner’s behalf to another state or local jurisdiction.

              Subd. 6 allows the commissioner to assess direct or indirect partners for taxes owed in the event that a partnership or tiered partner does not timely file report or make a payment.

              Subd. 7 requires the commissioner to adopt procedures for an audited partnership or tiered partner to enter into an agreement to use an alternative reporting and payment method upon demonstration that the requested method will reasonably provide for accurate reporting and payment of taxes, penalties, and interest.

              Subd. 8 allows the commissioner to adopt rules to establish a de minimus amount that would exempt a taxpayer from the requirements of sections 2 and 3.

Section 4, subd. 1 allows the commissioner to assess additional tax, interest, and penalties following a final federal adjustment in specified cases.

              Subd. 2 provides that regardless of whether a federal adjustments report is timely or untimely filed, the commissioner may only assess additional state amounts related to federal adjustments at the later of the 3½-year limit under current law, or the expiration of the one-year period following the date of filing the federal adjustment report with the commissioner.

              Subd. 3 provides that if a taxpayer does not file a federal adjustment report, the commissioner may only assess additional state amounts related to federal adjustments at the later of the 3½-year limit under current law, or the expiration of the 6-year period following the final determination date.

              Subd. 4 requires the commissioner to establish a process for making estimated payments of tax expected to result from a pending IRS audit and credit the payments against any tax liability found to be due. Taxpayers may claim a refund or credit for excess estimated tax payments provided that the taxpayer files a federal adjustment report or claim for refund or credit under section 5.

Section 5 allows taxpayers subject to the requirements of sections 2 and 3 to file refund claims that are related to federal adjustments made by the IRS on or before the last day for assessment under section 4.

Section 6 allows the reporting periods in sections 2 and 3 to be extended automatically by 60 days for an audited partnership or tiered partner with 10,000 or more direct partners, if written notice is provided to the commissioner. Provides that, when a taxpayer has consented to extension of time for assessment of federal income or withholding taxes, the period for which the commissioner may recalculate tax is extended for the adjustments allowed in section 4.

Section 7 repeals the provisions in current law for time limitations on assessment of tax due to changes made by the IRS, failure to file a report of federal tax changes, and reporting a change or correction made to a federal return.

Article 2 – Partnership Tax; Technical Changes

Section 1 adds a reference to the requirements of Article 1, sections 2 to 4, to the enforcement provisions of the Department of Revenue tax administration chapter.

Section 2 provides that taxes imposed on an audited partnership electing to pay at the entity level under Article 1, section 3, subd. 3, are joint and several liability of the partnership and general partners, for purposes of the tax administration and compliance chapter.

Section 3 adds a reference to the calculation of assessments under Article 1, sections 2 to 4, for purposes of assessing amounts owed as a result of an erroneous refund.

Section 4 adds a reference to Article 1, sections 1 to 4, for purposes of applying extensions resulting from incorrect determination of FAGI.

Section 5 adds a reference to Article 1, sections 2 and 3, to the penalty provisions for failure to notify the commissioner of a change or correction in a federal return.

Section 6 adds a reference to an audited partnership electing to pay at the entity level under Article 1, section 3, subd. 3, to the entities subject to tax as partnerships (as opposed to subject to tax as partners).

Section 7 adds a reference to the notice requirements Article 1, sections 2 and 3, for purposes of the notice requirements in the cigarette and tobacco tax chapter for filing a claim for refund due to a bad debt deduction at the federal level.

Section 8 adds a reference to the notice requirements Article 1, sections 2 and 3, for purposes of the notice requirements in the liquor tax chapter for filing a claim for refund due to a bad debt deduction at the federal level.

Section 9 adds a reference to the limitations periods in Article 1, sections 1 to 4, for purposes of repayment of taxes owed by businesses that no longer operate in a border city enterprise zone.

 

 

 
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