United States

Arizona: Legislation Addressing Federal Partnership Audit Changes Pending Signature

May 16, 2016
From KPMG TaxWatch

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The Bipartisan Budget Act of 2015, which was signed into law by President Obama on November 2, 2015, made a number of changes to the way partnerships and entities taxed as partnerships are audited at the federal level. In general (absent certain elections), the revised law allows the IRS to collect underpayments of tax from the partnership directly, rather than the individual partners. Although the imputed underpayment will be computed based on income, gain, loss, deduction or credit of the partnership for a past tax year, the assessment of the imputed underpayment will be in the current year. This potentially shifts the economic burden of the tax from former to current partners. Certain smaller partnerships can elect out of these provisions and there are provisions that allow a partnership to elect to push an imputed adjustment out to the partners.

Arizona Senate Bill 1288, which has passed both the house and senate, generally updates Arizona’s conformity to the Internal Revenue Code and revises the partnership return due dates to conform to federal. Importantly, the bill also addresses the federal partnership audit changes. Specifically, Senate Bill 1288 would require partnerships that receive an imputed underpayment under the new IRS regime to file a state return for the reviewed year that shows the adjustments to income or the gain, loss or deduction upon which the federal imputed adjustment was based.  If the adjustment results in a net increase in Arizona taxable income, the partnership would be required to file a return and pay the tax on the adjustment within 90 days at the highest Arizona individual rate. If the adjustment results in a net reduction in Arizona taxable income, the partnership is not authorized to claim a refund for amounts not actually paid by the partnership. Instead, the partnership must notify the partners of the adjustment within 90 days and each partner must file an amended return to claim a refund. If the adjustments are passed through to the partners, either because the partnership elects to do so or because the federal audit results in a reduction in Arizona taxable income, the statement provided to each partner would be considered a change in the taxable income of the partner and each partner would be required to file a return within 150 days of the date of the final determination of the IRS adjustment.

Arizona is the first state to advance legislation conforming to the federal changes. Please contact Marianne Evans at 202-533-4188 with questions on Senate Bill 1288.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.