|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
A “federal change” exists for Massachusetts tax purposes when the federal government determines that a taxpayer’s federal taxable income or federal tax credits are different from the taxable income or credits originally reported on a federal return. Taxpayers are required to inform the Department of Revenue (”DOR”) when a federal change has an effect on a tax or credit in Massachusetts.
Where a federal change reduces a taxpayer’s federal earned income credit (“EIC”), the change will result in a corresponding reduction in the taxpayer’s Massachusetts EIC. If DOR previously issued a refund of Massachusetts EIC amounts to the taxpayer, the taxpayer must repay any amount due triggered by the federal change.
Technical Information Release (TIR) 15-13 and TIR 16-13 established the process for filing amended returns to report federal changes generally but did not directly address situations where repayment was required. This Directive provides specific guidance relating to such repayments. Additionally, this Directive provides guidance relating to DOR’s demand and assessment process in such cases. TIR 06-11 is superseded to the extent that it is inconsistent with this Directive.
a. How should a taxpayer report a federal change that reduces the taxpayer’s Massachusetts EIC and repay any amounts that must be returned as a result of the reduction?
b. Where DOR determines that, as a result of a federal change, DOR previously refunded EIC amounts to a taxpayer that must now be repaid, how will DOR recover such amounts?
a. A taxpayer with a federal change that reduces the amount of Massachusetts EIC that was previously refunded to the taxpayer should file an amended return reporting the reduction and repay any amounts that must be returned with the filing of the amended return. If the payment is made within 30 days of the filing of the amended return, no interest and penalties will be charged on the amount required to be returned.
b. Where DOR determines that, as a result of a federal change, DOR previously refunded Massachusetts EIC amounts to a taxpayer that must now be repaid, DOR may demand repayment by issuing a formal demand. If the full amount is not paid within 30 days of the demand, the amount demanded is considered a tax assessed under G.L. c. 62C, subject to applicable interest and penalties.
Repayment Process Where Taxpayer Reports a Federal Change
In the case of most federal change filings, the federal change will affect the amount of Massachusetts tax due for a certain period, and any additional Massachusetts tax due, with applicable interest, will be assessed or abated as a result of the federal change. A special circumstance is created where the federal change does not alter state tax liability, but does change the amount of a state refundable credit. The most common example of this situation is a federal change adjusting the amount of Massachusetts EIC that a taxpayer may claim. This TIR discusses this special circumstance.
As stated in TIRs 15-13 and 16-13, a personal income taxpayer must file an amended return to report any federal changes within one year of the date of the federal notice of final determination. Where the federal change results in a reduction in EIC that was previously refunded, the taxpayer must file an amended return reporting the reduction and repay the amount of such reduction within one year of the federal determination. If payment is made within 30 days of the filing of the amended return, no interest and penalties will be imposed. However, if payment is not made within 30 days, the amount required to be repaid shall be considered a tax, assessed under G.L. c. 62C, as of the date of the amended return and will be subject to all applicable interest and penalties.
Where a federal change reducing the EIC results in an amount due, the amount will be considered “a tax due and payable when the tax return was required to be filed” under G.L. c. 62C, § 32(a). The tax due will be subject to interest as of the return due date and penalties may be imposed without the benefit of a 30-day period for repayment.
Repayment Process Where DOR Makes a Demand for Repayment
Where DOR determines that a federal change reduces the amount of Massachusetts EIC that was previously refunded to a taxpayer, DOR will make a demand for repayment of these amounts pursuant to G.L. c. 62C, § 36A. DOR will also follow this demand process when a federal change effects a change to Massachusetts adjusted gross income which in turn may affect other items of tax or credits, such as the circuit breaker credit in G.L. c. 62, § 6(k). DOR shall notify the taxpayer in writing making a demand for repayment. If the taxpayer does not repay the amount demanded in full within 30 days after the date of the demand, any outstanding amount will be considered a tax assessed under G.L. c. 62C, without further action by DOR, as of the date of the demand.
In 2005, G.L. c. 62C, § 36A was amended to allow DOR to demand a return of payments made in error. TIR 06-11 explains the changes to the statute and describes the procedures for making such a demand. Although the statute does not impose any time limitations on DOR’s authority to seek a demand for repayment, TIR 06-11 states that a demand for repayment may be made at any time within three years from the date of the payment in error. However, with respect to demands for repayment, TIR 06-11 does not specifically address time limits applicable to demands involving federal changes.
Pursuant to this Directive and effective for any federal changes that effect the Massachusetts EIC reported from the date of this Directive forward, DOR may make a demand for repayment at any time within one year of the receipt of the taxpayer’s federal change report, or where no report is filed, within two years from the date of the receipt by DOR of information from the federal government of the final determination, whichever is later. Nothing in this Directive shall prevent DOR from making a demand for repayment under the time limitations already allowed under TIR 06-11.
Since G.L. c. 62C, § 36A renders any outstanding liability "a tax assessed . . . as of the date of the demand," no interest or penalties for periods prior to the date of demand are imposed. Nonetheless, if a taxpayer fails to make full payment within 30 days of the demand, the tax will be assessed and interest and penalties will begin to accrue on any outstanding amounts as of the date of the demand, and other penalties may also apply (e.g., 10 percent penalty for failing to report a final determination set forth in G.L. c. 62C, §§ 30 and 30A). The provisions of G.L. c. 62C, § 65, pertaining to the ten year time limitation for collection of taxes shall apply as of the date of the demand.
/s/Christopher C. Harding
Christopher C. Harding
Commissioner of Revenue
December 21, 2017