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- Massachusetts Department of Revenue
Technical Information Release TIR 22-1: Reporting Rules Related to Centralized Federal Partnership Audits
Table of Contents
In enacting the Massachusetts Fiscal Year 2021 Budget (the FY21 Budget), the Legislature adopted important changes to the state tax audit procedures applicable to partnerships. Specifically, the FY21 Budget adopted new G.L. c. 62C, § 30B, which coordinates state tax administrative processes with federal audits conducted under the Centralized Federal Partnership Audit (“CFPA”) regime. The CFPA generally seeks to streamline federal partnership audits by including both the partnership and the partners in the same review, assessment, and payment process. This Technical Information Release (TIR) explains the new Massachusetts partnership tax audit provisions at G.L. c. 62C, § 30B, and describes the Massachusetts reporting and payment obligations of partnerships and partners that are subject to a centralized federal partnership audit (“federal audit”). Partnerships are subject to § 30B, including the notice requirements described in this TIR, in any instance in which, as a result of a federal audit, there is a difference in the Massachusetts tax liability of any partner from that previously reported. The Department of Revenue (“Department”) has developed a process that will allow partnerships to report federal audit adjustments and report and pay audit assessments on behalf of their partners through the Department’s electronic tax system, MassTaxConnect.
II. Reporting and Filing Procedures
A. Triggering event for a partnership’s reporting and filing obligations: “final determination date”
Section 30B creates an obligation for partnerships subject to a federal audit to make certain state notifications and filings. The triggering event for these obligations is generally the “final determination date.” This term is defined in G.L. c. 62C, § 30B as the date on which any one of several different events take place, including a federal administrative adjustment issued to the partnership or an amended return, or “pull in” report filed or made by a partner prior to the conclusion of the audit. See G.L. c. 62C, § 30B(a).
Because there are a number of federal events that may result in a final determination date as to one or more specific tax items, it is possible for a partnership under federal audit to have more than one final determination date, and therefore more than one Massachusetts reporting and/or filing obligation during and after the federal audit process. The filing and reporting requirements referenced in this TIR apply with respect to each final determination. The following sections outline these obligations and the methodology to be used.
B. Partner-level filing requirement
A partner in a partnership subject to a federal audit is obligated to report and pay tax due under chapter 62 or chapter 63 with respect to adjustments resulting from such audit. A partner may anticipate these adjustments and make payment during the audit, as noted above, through either a federal amended return or a “pull in” report. In either instance, the partner must report its Massachusetts liability by amending its previously filed state return (or filing a return where no such return was previously filed) not later than 180 days after the final determination date.
If a partner’s liability resulting from a final determination is not paid by the partner during the audit by means of an amended return filed with the Department or on the partner’s behalf by the partnership subsequent to the conclusion of the audit, the partner must amend its return for the tax year to which the change is attributable not later than 180 days after the final determination date resulting from the conclusion of the audit. The requirement to make such report and payment is treated as being in response to a federal change within the meaning of section 30 of chapter 62C and is subject to the interest and penalties imposed thereunder. In addition, the statute of limitations for assessing a partner with liability that results from a final determination is tolled in any instance in which the audited partnership does not provide the Department with the required notices and filings. See also II.C.1., below. Therefore, if such partnership does not notify the Department of a partner’s Massachusetts tax obligation, the statute of limitations for assessing the partner is tolled.
C. Partnership-level reporting and filing requirements
1. Partnership reporting to the Department and to its partners
Not later than 90 days after a final determination date with respect to a federal audit, the audited partnership must: (i) notify the Department of the final determination date; (ii) file a federal adjustments report with the Department; and (iii) notify all direct partners that have a Massachusetts tax obligation deriving from the final determination of their distributive share of the final federal adjustment. The federal adjustments report shall: (i) identify each partner during the reviewed year; (ii) specify each item addressed by, and the amount included in, the final federal adjustment; and (iii) explain whether and how the final federal adjustment needs to be modified for state tax purposes to reflect relevant differences between federal and state law. In the case of a final determination with respect to a filing made by a partner during a partnership audit, the audited partnership must notify the Department of the final determination date and file a federal adjustments report with the Department that is specific to that partner. This notification must be not later than 90 days after this final determination date.
In addition to the filing requirements set out above, a partnership must furnish the Department with copies of any reports filed with the IRS related to the federal audit that are relevant to the Massachusetts tax computation including, for example, Form 8980, Partnership Request for Modification, Form 8982, Affidavit for Partner Modification, Form 8985, Pass-Through Statement, and Form 8986, Partner(s) Share of Adjustment(s) to Partnership-Related Items. The Department may require additional information related to the final determination or modification.
During the course of the federal audit, the IRS may resolve some or all of the items being evaluated through an “approved modification.” An audited partnership must notify the Department of any approved modification not later than 90 days after the date of such approval.
An audited partnership that fails to meet these filing requirements is subject to the non-filer penalties under chapter 62C. The statute of limitations for assessing a partner or an audited partnership that has been subject to a federal audit is tolled in any instance in which the audited partnership has not provided the Department with the required notices and filings.
2. Amendment of withholding and composite returns
There may be a final determination that results in a Massachusetts tax obligation in the case of an audited partnership that originally reported or paid tax on behalf of some or all of its partners by means of a composite return or through pass-through entity withholding. In those instances, the audited partnership must amend that return or withholding filing not later than 90 days after the final determination with respect to a federal assessment or administrative adjustment. The amended return or filing must account for the distributive share of the final federal adjustment attributable to each partner that was part of the original composite return or withholding filing.
If the amended return or withholding filing does not fully account for the Massachusetts taxes due from an audited partnership’s partners, the audited partnership may make a partnership-pays election to pay such taxes. See Section II.C.3, below. Also, and in any event, an audited partnership required to file an amended composite return or withholding report may satisfy this filing requirement by instead utilizing the partnership-pays election to pay all the Massachusetts tax due.
A partnership that is required to amend a composite return or withholding filing under this section, and that does not instead elect to make a partnership-pays election to address this requirement, as discussed in II.C.3, below, must file its amended composite return or withholding filing and remit payment through MassTaxConnect.
3. Partnership-pays election
An audited partnership may make an election to pay Massachusetts taxes owed by its partners resulting from a federal audit of the partnership. This “partnership-pays” election applies to taxes that are not otherwise accounted for through (i) a prior partner filing or (ii) the filing of an amended composite return or withholding filing. This election must be made not later than 90 days after the final determination date with respect to a federal assessment or administrative adjustment. A partnership making this election is permitted to account for all taxes owed to Massachusetts as a result of the final determination in a single filing, eliminating the need for an amended composite return or withholding filing. The partnership-pays election is generally irrevocable.
If a partnership makes a partnership-pays election, the partnership must calculate and pay the tax due from partners at the partnership level. An audited partnership making this election shall make such payment not later than 180 days after the final determination date. The rules for calculating the partnership-pays obligation are set forth in G.L. c. 62C, § 30B(e).
Audited partnerships that make the partnership-pays election and partners in such partnership are treated as a taxpayers for purposes of chapters 62, 62C and 63, as applicable, with respect to the duties and obligations imposed by, and any rights resulting from, said sections. In the event the partnership makes the partnership-pays election and does not pay all the tax owed within the statutory timeframe, the individual partners continue to be liable individually to pay their share of the obligation.
4. Partnership representative
An audited partnership that undergoes a federal audit is represented for Massachusetts tax purposes by the partnership representative as determined under the CFPA. The actions of the partnership representative are binding on all partners, direct and indirect, with respect to the Massachusetts reporting and filing requirements. The partnership representative is responsible for submitting all notices and making all filings required of the partnership subject to federal audit.
/s/Geoffrey E. Snyder
Geoffrey E. Snyder
Commissioner of Revenue
January 6, 2022