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Administrative Procedure AP 619: Reporting Changes in Federal Taxable Income, Federal Tax Credits, or Federal Taxable Estate
Table of Contents
619.1. In General
If the Internal Revenue Service (IRS), through audit, acceptance of an amended return, or otherwise, makes a final determination that a taxpayer's federal taxable income, federal tax credits, or federal taxable estate differs from what was originally reported, the taxpayer must inform the Department of Revenue (DOR) of that change. A federal determination is final if there is no right of administrative or judicial appeal. See 830 CMR 62C.30.1(2) and TIR 99-14 for more information on final determinations.
The requirement to report a federal change applies to income, corporate and estate taxpayers as described below.
Similarly, if DOR adjusts a Massachusetts return in such a way as to increase federal taxable income, the taxpayer generally must inform the IRS. Contact the IRS for more information.
NOTE: The IRS and DOR routinely exchange audit information.
619.2. Reporting Federal Changes in Income Tax
If the IRS changes the federal taxable income or federal tax credits of any individual, partnership, trust or other entity that is subject to the income tax or that has partners, members, or shareholders subject to the income tax, the taxpayer must report the change and pay any additional tax due with interest within one year from the date of the final federal determination. Changes in federal taxable income or federal tax credits are reported to Massachusetts on an amended return. A copy of the IRS Form CP-2000 or the IRS Revenue Agent's Report and any other relevant documentation must be attached.
619.3. Reporting Federal Changes in Corporate Excise
If the IRS changes the federal taxable income or federal tax credits of any corporation subject to the Massachusetts corporate excise, the corporation must report that change by filing an amended return and pay any additional tax due with interest within three months of the final federal determination. This form must be accompanied by a copy of the IRS Revenue Agent's Report and any other relevant documentation. The principal reporting corporation for a combined filing group must report any final determination with sufficient detail to attribute and allocate the federal adjustments to the members of the group.
619.4. Reporting Federal Changes in Taxable Estate
Federal estate tax changes must be reported within two months of a final federal determination (for example, the federal closing letter, agreed federal audit changes, agreed IRS Appeals Office changes, or Tax Court decision). An amended Form M-706 must be used to report any change. The Form M-706 is an "amended" return when the box on page 1 of the return is checked. For further information regarding what constitutes a federal change, see TIR 99-14, Expanded Definition of "Federal Change." Attach a copy of the final federal determination and pay any additional Massachusetts estate tax, interest and penalty, if any, due as a result of the change.
For deaths occurring on or after January 1, 2003, the schedules of the July 1999 revision of the United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706, that are changed by the final federal determination must be amended in addition to the Amended M-706. The amended schedules must be submitted with an amended page 1, which contains the tax computation, and an amended page 3, which contains the recapitulation, of the July 1999 revision. Any federal change must relate to an entry that was reported on the July 1999 revision of the federal Form 706.
619.5. Process for Amending Tax Returns to Report a Federal Change
Most taxpayers are required to amend their returns electronically using MassTaxConnect (MTC) and/or third-party software. See TIR 16-9. Personal income taxpayers, corporations filing a combined report and certain other C and S corporations are encouraged to file amended returns electronically if the return is prepared through third-party software and e-file is available. Taxpayers filing amended returns on paper will manually complete the same tax form as used for the original or prior amended return, whichever is filed later, and check the box indicating the return is an amended return relating to a federal change. See 830 CMR 62C.26.2.
Please note: the amended return must include all forms and schedules included with the original return to be processed correctly. Do not include any additional documents, like a copy of the original return or an application for abatement. If the amended return incorporates changes that are the result of an IRS audit, please include a complete copy of the federal audit report, federal amended return (if applicable), and supporting schedules.
Taxpayers must pay any tax due on an amended return at the time of filing or they will be subject to applicable interest and penalties. Certain payments may also be subject to electronic payment requirements. See TIR 16-9. Interest on any refunds will be subject to the provision of G.L. c. 62C, § 40.
619.6. Additional Assessment by DOR
If DOR determines from a taxpayer's federal change report that the correct Massachusetts tax was not fully assessed, it will assess the additional tax with interest. DOR may assess the additional tax within one year of receipt of the taxpayer's report, or within the assessment time limitations of G.L. c. 62C, § 26, whichever is later.
If the taxpayer does not report the change to DOR, DOR will receive the information from the IRS and will have two years from receipt of the IRS report in which to assess the additional tax, or within the assessment time limitations of G.L. c. 62C, § 26, whichever is later. The taxpayer will also be subject to a penalty as described below in AP 619.10. An assessment with respect to federal change is limited to changes in a taxpayer's tax liability resulting from the change in federal taxable income, federal tax credits or federal taxable estate.
619.7. Refunds and Abatements
If a taxpayer believes that as a result of a change in federal taxable income or federal taxable estate a lesser tax was due the Commonwealth than was previously assessed, the taxpayer may also submit an amended return seeking a reduction of tax. See 619.5. The taxpayer may request a refund within one year of the final federal determination, or within the limitations of G.L. c. 62C, § 37, whichever is later. A refund sought under G.L. c. 62C, § 37 is also subject to the limitations in G.L. c. 62C, § 36. Any reduction in Massachusetts tax sought under G.L. c. 62C, § 30, the federal change statute, are limited to changes directly attributable to changes in the federal determination. See 830 CMR 62C.26.2 and 62C.30.1.
If DOR has assessed the taxpayer an additional tax as a result of a taxpayer's report of federal change, and the taxpayer disagrees with the DOR assessment, the taxpayer may submit a dispute with the Office of Appeals. The simplest and most direct method to submit a dispute is electronically through MassTaxConnect. A taxpayer who does not have access to MTC may complete and mail a paper Form ABT, Application for Abatement.The dispute must be submitted within three years of the filing date of the original return, two years of the date of assessment, or within one year of the date of payment, whichever is later. See 830 CMR 62C.37.1 and AP 627, Applications for Abatement, for more information on disputing a DOR assessment.
A taxpayer that owes additional tax as a result of a federal change, and that is submitting an amended return to report such changes, may request that the additional tax be offset, or reduced, based on issues for the same tax type and tax year that are unrelated to the federal change. The taxpayer should report the changes on the amended return and attach an explanation justifying the offset to the report of federal change. The taxpayer may request an offset within one year of the final federal determination, or within the limitations of G.L. c. 62C, § 37, whichever is later. A refund sought under G.L. c. 62C, § 37 is also subject to the limitations in G.L. c. 62C, § 36. The Commissioner will determine the taxpayer’s balance due, taking the taxpayer’s offset request into consideration.
If DOR has assessed an additional tax as a result of a federal change, the taxpayer may request that the additional tax be offset, or reduced, based on issues for the same tax type and tax year that are unrelated to the federal change, by filing an amended return within three years of the filing date of the original return, two years of the date of assessment, or within one year of the date of payment, whichever is later. See 830 CMR 62C.26.2. The taxpayer should attach an explanation justifying the offset with the amended return.
If a taxpayer has requested a reduction in Massachusetts tax as a result of a federal change, the Commissioner may offset the amount of the reduction requested with any additional tax due, whether or not the additional tax is based on issues related to the change. However, the additional tax due may not exceed the amount of the reduction in tax under G.L. c. 62C, § 30.
619.9. Federal Changes Resulting in a Credit Adjustment
If the federal change results in the adjustment of Massachusetts credit claimed on a prior return, the taxpayer should file an amended return reporting the change. Any overpayments and refunds resulting from a credit adjustment are likewise subject to statutory limitations (including those contained in G.L. c. 62C, §§ 30, 30A, 36, 37, and 40) and refunds are subject to any allowable offset or intercept. These amended returns are also subject to further DOR review, as stated in AP 605.2.
If any portion of the credit amount being reduced was previously refunded to the taxpayer, the taxpayer must repay that amount with the filing of the amended return. The most common example of this situation is a federal change of an Earned Income Credit that results in a reduction of a previously refunded amount of the Massachusetts Earned Income Credit. See, DD 17-3 for more information.
619.10. Penalty for Failure to Report and Pay
Failure to report a federal change and to pay any additional tax within the time limits described above will result in additional interest and penalties, including a penalty of 10% of the additional tax due. See TIR 10-11.
For general information on federal changes, call DOR (617) 887-MDOR or toll-free within Massachusetts at 1 (800) 392-6089. For specific information on changes in federal taxable income or federal tax credits, contact the Bureau of Desk Audit, Federal Change Unit, P.O. Box 7020, Boston, MA 02204, (617) 887-6900. For more information on federal estate tax changes, contact Massachusetts DOR, Estate Tax Unit, P.O. Box 7023, Boston, MA 02204, call 617-887-6930.
G.L. c. 62C, §§ 26, 30, 32(e), 33(c), 37, 40
830 CMR 62C.26.2
830 CMR 62C.30.1(2)
830 CMR 62C.33.1
830 CMR 62C.37.1
AP 627: Applications for Abatement
Form M-706: Massachusetts Estate Tax Return
Form M-706NR: Massachusetts Nonresident Estate Tax Return and Domicile Affidavit
Form 706 (Federal): United States Estate (and Generation-Skipping Transfer) Tax Return (Rev. July 1999)
Form CP-2000 (Federal)
Revenue Agent’s Report (Federal)