Optional state tax responses to partnership audit adjustments

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An adjustment from a centralized partnership audit usually creates reporting obligations and may require additional state income tax payments. Taxpayers may benefit from provisions adopted by several states allowing:

• Alternative partnership reporting and payment methods
• Estimated tax payments for liability expected to result from the audit
• De minimis partnership reporting exceptions.

What is the impact of the Inflation Reduction Act of 2022?

The Inflation Reduction Act, signed on August 16, 2022, provides for increased Internal Revenue Service (IRS) funding, with nearly $46 billion allocated to enforcement efforts. It is anticipated that this will result in more audits of complex partnerships.

Many states have adopted rules similar to the federal centralized partnership audit rules. These provisions may come into play as IRS enforcement ramps up.

What are the MTC model statute provisions?

The Multistate Tax Commission (MTC) promotes uniformity and consistency among the states by analyzing federal laws and making recommendations for model provisions. The MTC model language helps states establish uniform statutes or rules making compliance easier for multistate taxpayers.

The MTC adopted a model statute for reporting federal partnership audit adjustments to assist states in assessing state taxes resulting from audit adjustments.

The model includes provisions addressing:

• alternative partnership reporting and payment methods;
• estimated tax payments; and 
• de minimis partnership reporting exceptions.

Are alternative partnership reporting and payment methods allowed?

The MTC model permits a state to enter into an agreement with a partnership or partner to use an alternative reporting and payment method. The provision requires that the partnership or partner shows that the requested method will reasonably provide for the reporting and payment of taxes, penalties, and interest due. To qualify, the application must be made within the time allowed for the election to pay.

States with similar provisions

Several states have adopted the MTC model alternative partnership reporting and payment provisions, or similar provisions, including:

• California
• Indiana
• Iowa
• Kentucky
• Louisiana
• Michigan
• Montana
• New Mexico
• Ohio
• Vermont
• Virginia
• West Virginia

Can estimated tax payments be made?

The MTC provides details for making estimated payments to the state for any tax liability expected to result from the audit. A taxpayer may make estimated payments to the state for the tax expected to result from a pending IRS audit, prior to the due date of the federal adjustments report, without having to file the report. The estimated payments limit the accrual of further statutory interest on that amount.

States with similar provisions

Several states have adopted the MTC estimated tax payment model provisions, or similar provisions, including:

• Kentucky
• Louisiana
• Massachusetts
• Minnesota
• Missouri
• Montana
• New Mexico
• Ohio
• Vermont
• West Virginia

Are there de minimis partnership reporting exceptions?

The MTC model allows a state to establish a de minimis exception to the partnership reporting and payment requirements. The state may establish a de minimis amount upon which a taxpayer is not required to comply with the partnership reporting and payment rules.

States with similar provisions

Some states have adopted the MTC model de minimis partnership reporting exception provisions, or similar provisions, including:

• California
• Kentucky
• Louisiana
• Vermont
• Virginia
• West Virginia

Taxpayers may find these provisions helpful in reporting and responding to federal partnership audit adjustments. In some cases, taxpayers may be able to limit interest incurred or even avoid reporting adjustments and paying additional state income taxes.