Limitations period for state tax refunds under centralized partnership audit rules

An adjustment from a centralized partnership audit may result in a state income tax overpayment allowing the taxpayer to request a refund. Several states have limitations periods for requesting a refund resulting from these audits that differ from the standard statute of limitations period.

Taxpayers must know the applicable limitations period so they don’t miss an opportunity for a refund or credit of state taxes

Negative federal adjustments resulting from audit

While most audits conducted under the centralized partnership audit rules are intended to find and collect on a taxpayer’s understatement of tax, an audit could result in a negative adjustment. Negative adjustments can result in the taxpayer having overpaid state taxes.

Negative and positive federal adjustments may be netted if they fall into the same category of items. But adjustments reallocating the distributive share of any item from one partner to another may not be netted.

If the negative adjustments are not netted, they may be pushed-out to the partners, who will compute the tax difference for the reviewed year. If this results in a nonrefundable credit on their adjustment year returns, taxpayers may then report those adjustments and claim a state tax refund.

MTC model statute provision

The Multistate Tax Commission (MTC) adopted a model statute for reporting federal partnership audit adjustments. The model includes provisions applicable to claims for a refund or credit of tax arising from final federal adjustments.

The MTC model provides that, except when required to account for negative adjustments in the partnership return for the adjustment or other year, a taxpayer may file a claim for refund or credit resulting from final federal audit adjustments on or before the later of:

• the expiration of the standard limitations period for filing a claim for a refund or credit; or
• one year from the date the federal adjustments report was due to the state.

State provisions

Some states have adopted the MTC model provisions for determining the time period within which the taxpayer must file a claim for a refund or credit of tax arising from federal adjustments. These states include:

• Georgia
• Iowa
• Kentucky
• Louisiana
• Minnesota
• Missouri
• Montana
• Vermont – Effective for adjustments with a final determination date occurring on and after July 1, 2022.
• West Virginia

State provisions similar to the MTC model

Other states have adopted provisions similar to the MTC model language:

- California provides that taxpayers must file a claim for credit or refund resulting from federal audit adjustments on or before the later of:

• the expiration of the standard limitations period for filing a claim for a refund or credit; or
• 2 years from the date of the final federal determination.

- Indiana provides that taxpayers must file a claim for a refund resulting from federal audit adjustments on or before the later of:

• the expiration of the standard limitations period for filing a claim for a refund; or
• the date on which the taxpayer is required to file an amended return with the state.

- New Mexico requires taxpayers file a claim for a credit or refund resulting from federal audit adjustments on or before the expiration of the standard limitations period for filing a claim for a refund or credit.

- Oregon provides that taxpayers must file a claim for refund resulting from federal audit adjustments on or before the later of:

• the expiration of the last date for generally filing a claim for a refund; or
• 2 years following the date of the federal notice of final partnership adjustment.

- Virginia requires taxpayers file a claim for a refund resulting from federal audit adjustments on or before one year from the date the federal adjustments report was due to the state.

State provisions differing from the MTC model

Other states have their own completely different provisions:

• Ohio provides that a taxpayer may file a claim for a refund within 90 days after the final federal adjustment determination.
• Rhode Island requires the taxpayer to file a claim for a refund resulting from federal audit adjustments within 180 days after receipt of notification of the final federal adjustments.

Required documentation

The MTC model provisions include a method for supporting a claim for a refund or credit of tax. The taxpayer must provide the federal adjustments report with the claim for a refund or credit.

States with a similar requirement include:

• Kentucky
• Louisiana
• Missouri
• Vermont – Effective for adjustments with a final determination date occurring on and after July 1, 2022.
• Virginia
• West Virginia