Federal Change Abatement Resulting from IRS Audit or Massachusetts Amended Return

If, as a result of a change by the federal government in a taxpayer's federal taxable income, a taxpayer believes that a lesser tax was due the Commonwealth than was previously paid, the taxpayer may apply to the Commissioner of Revenue for an abatement by submitting a Form CA-6, Application for Abatement/Amended Return pdf format of    CA-6.pdf  , within one (1) year of the date of notice of the final determination by the federal government. The one year rule also applies to a final determination of a change made by the IRS, which was initiated by the filing of an amended federal return by the taxpayer. For further information, see Chapter 485 of the Acts of 1998.

Definition of Final Determination by the Federal Government Effective as of January 1, 2004:
A final federal determination means there is no further administrative or judicial appeal. Changes in federal taxable income resulting from a closing agreement, an offer in compromise or any similar agreement executed on or after January 1, 2004, constitute a final determination of a change by the federal government. An agreement may constitute a final determination whether or not any audit or other review is complete with respect to issues not addressed in the agreement.

Since a taxpayer has one (1) year to file, it is usually wise to wait for the Notice of Final Determination from the IRS before filing an amended Massachusetts return.

Federal Change Assessment

Taxpayer Assessments - To Report an Increase in Tax as a Result of a Federal Change:
  • Personal Income Tax - Within One Year from Taxpayer's Receipt of Notice of Final Federal Determination:
    Massachusetts requires that, if the federal taxable income of a taxpayer is finally determined by the federal government to be different from the taxable income as originally reported, such final determination should be reported on a Form CA-6, Application for Abatement/Amended Return pdf format of    CA-6.pdf  , accompanied by payment of any additional tax due and be received by DOR or be postmarked by the United States mail within one year from taxpayer's receipt of notice of such final federal determination.
  • Corporate Excise Tax - Within Three Months from Taxpayer's Receipt of Notice of Final Federal Determination:
    Massachusetts requires that, if the federal taxable income of a corporation is finally determined by the federal government to be different from the taxable income as originally reported, such final determination should be reported on a Form CA-6, Application for Abatement/Amended Return pdf format of    CA-6.pdf  , accompanied by payment of any additional tax due and be received by DOR or be postmarked by the United States mail within three (3) months of receipt of notice of such final determination.

Definition of Final Determination by the Federal Government:
A final federal determination means there is no further administrative or judicial appeal. Changes in federal taxable income resulting from a closing agreement, an offer in compromise or any similar agreement executed on or after January 1, 2004, constitute a final determination of a change by the federal government. An agreement may constitute a final determination whether or not any audit or other review is complete with respect to issues not addressed in the agreement.

DOR Assessments - If Taxpayer Either Did Not Submit the Correct Massachusetts Tax or Did Not Report the Change:
 

  • Correct Tax Not Fully Assessed - One Year of DOR's Receipt of the Taxpayer's Federal Change Report:
    If DOR determines from a taxpayer's federal change report that the correct Massachusetts tax was not fully assessed, it may assess the additional tax within one year of DOR's receipt of the taxpayer's federal change report, regardless of any other assessment limitations and regardless of whether such changes resulted in any increased federal tax liability.
  • Taxpayer Does Not Report the Change - Two Years from DOR's Receipt of Information from the Federal Government:
    If the taxpayer does not report the change, DOR has two years from DOR's receipt of the information from the federal government to assess any additional tax resulting from the federal changes, regardless of any other assessment limitations.

Federal Change for Voluntary Disclosure of Unreported Offshore Accounts or Assets

Federal Rules:
US taxpayers are required to annually report their financial interest in, or signature authority over, a financial account that is maintained with a financial institution located in a foreign country if the aggregate value of all such accounts exceeded $10,000 at any time during the year.

Federal Penalty Framework Effective until September 23, 2009:
Those seeking to take advantage of the voluntary disclosure initiative must:

  1. pay back-taxes and interest for six years;
  2. pay accuracy/delinquency penalties on all six years; and
  3. pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value.

Persons complying with the voluntary disclosure will avoid any potential criminal prosecution.

US Form TD F 90-221 "FBAR"
This reporting requirement is met by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as "FBAR."

Penalty Framework Effective Date Extended until June 30, 2010:
Persons with signature authority over, but no financial interest in, a foreign financial account, and persons with a financial interest in, or signature authority over, a foreign commingled fund, will have until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years with respect to these foreign financial accounts.

Massachusetts Rules:
If the federal government finally determines that there is a difference from the amount previously reported in the taxable income of a person or estate, the final determination must be reported by such person or estate accompanied by payment of any additional tax due with interest. DOR defines a "federal determination" as including "an agreement between the taxpayer and the Commissioner of Internal Revenue to an assessment of any type of liability, including an accepted offer in compromise on an issue of liability." A "federal determination" is "final" when there is no right of administrative or judicial appeal. Such determination requires a personal income tax filer to report the change in federal taxable income resulting in increased Massachusetts tax liability within one year of the date of notice of the federal government's final determination. The failure to do so will trigger additional penalties and interest.

Federal Change:
A federal change is reported on Form CA-6, Application for Abatement/Amended Return.


Federal or State Change Failure to Report Penalty:

Unless the taxpayer shows reasonable cause for failure to comply with these provisions, any person or estate failing to report a federal change or other state change shall be assessed a penalty and such penalty shall become part of the additional tax found due.

Chapter 131 of the Acts of 2010:
Prior to July 1, 2010, the penalty was the lesser of $100 or 10% of the tax due. The new penalty calculation is 10% and will be applied to penalty assessments dated on or after July 1, 2010.


Documentation to Submit with Abatement/Amended Tax Return:

Federal Change Abatement Resulting from IRS Audit:
  • All relevant Massachusetts and federal schedules that will substantiate the federal change;
  • Explanation of any differences between Massachusetts and federal taxable income;
  • Copy of IRS documents (if available) such as:
    • Signed and dated Federal Revenue Agent Report - Form 4549; or
    • Refund check from the IRS; or
    • Any additional federal documents showing the IRS final determination of federal taxable income.

Massachusetts Amended Return to Reflect Federal Amended Return:

  • For personal income, copy of Form 1040, U.S. Individual Income Tax Return, and Form 1040X, Amended Individual Income Tax Return;
  • For corporate excise, copy of 1120X;
  • All relevant Massachusetts and federal schedules that will substantiate the federal change;
  • Explanation of any differences between Massachusetts and federal taxable income;
  • Copy of IRS documents (if available) such as:
    • Signed and dated IRS Acceptance Letter - Form 8488; or
    • Refund check from the IRS; or
    • Any additional federal documents showing the IRS final determination of federal taxable income.

Note: In some instances, where there are complex issues involved, DOR will wait for the IRS acceptance letter.

If disputing the federal change assessment: 

  • Copies of original and revised IRS audit report;
  • Statement of account from the IRS verifying that the original assessment was revised and/or reversed;
  • Explanation of differences between Massachusetts and federal taxable income, deduction or credits.

Massachusetts References: