RAR S TIMING IS EVERYTHING

Transcription

1 RAR S TIMING IS EVERYTHING Moderator Fred Nicely (Council on State Taxation) Presenters Marilyn A. Wethekam, Horwood Marcus & Berk, Chicago, IL Steven P. Spaletto, Deloitte, Indianapolis, IN April 23, 2015 COST 2015 Spring Income Tax Conference / / 1 TOPICS COVERED Overview of IRS Procedures Reporting of Federal Changes Protective Claims for Refund Common Practices / / 2 1

2 POLLING QUESTION HOW OFTEN DO YOU HAVE TO DEAL WITH FILING AMENDED STATE TAX RETURNS AFTER AN IRS AUDIT? A. IT IS A CONTINUOUS PART OF MY JOB B. I HAVE TO DEAL WITH IT EVERY COUPLE OF YEARS C. I VE DEALT WITH IT ONCE OR TWICE D. I M HERE BECAUSE MY FIRST ONE IS COMING UP! It is a continuous part of.. 25% 25% 25% 25% I have to deal with it eve.. I ve dealt with it once or... I m here because my first... / / 3 POLLING QUESTION WHAT HAS BEEN YOUR EXPERIENCE IN FILING AMENDED STATE INCOME TAX RETURNS AFTER AN IRS AUDIT? A. IT WAS A NIGHTMARE B. OKAY, EXCEPT FOR ONE OR TWO STATES C. ALL WENT WELL D. MY COMPANY HAS TO FILE AMENDED STATE RETURNS? It was a nightmare 25% 25% 25% 25% Okay, except for one or t.. All went well My company has to file... / / 4 2

3 IRS PROCEDURES OVERVIEW OF IRS PROCEDURES STATUTE OF LIMITATIONS FOR ASSESSMENT General Rule: 3 years after taxpayer has filed its return Extended SOL in the following circumstances: 6 years if omission of more than 25% OF GROSS INCOME No deadline if don t file return or file false or fraudulent return. Extended deadline if IRS and taxpayer agree in writing to extend the period of limitations (Forms 872, Fixed Period Consent, and Form 872-A, Special Consent (Open-Ended); either may be restricted to one or more specific issues). / / 6 3

4 OVERVIEW OF IRS PROCEDURES CONSEQUENCES OF SIGNING FORM 870 Taxpayer waives their right to notice of deficiency and IRS will assess tax immediately. Taxpayer is ordinarily precluded from contesting the adjustments by filing a petition with the Tax Court, but it does not prevent taxpayer from seeking a refund. / / 7 OVERVIEW OF IRS PROCEDURES TYPES OF WAIVERS Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax Acceptance of Overpayment (discussed above). Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency (Appeals Division). DIFFERENCES BETWEEN 870 AND 870-AD Form 870 AD Form 870 Can the case be reopened? No Yes Effective Upon IRS Acceptance Execution by Taxpayer Taxpayer prevented from Yes No filing refund claim? Can IRS make an additional assessment? No Yes / / 8 4

5 OVERVIEW OF IRS PROCEDURES CLOSING AGREEMENTS (SETTLEMENT AGREEMENTS AUTHORIZED BY THE INTERNAL REVENUE CODE) Form 866, Agreement as to Final Determination of Tax Liability, provides for finality as to tax liability Form 906, Closing Agreement on Final Determination Covering Specifics Issues, provides finality as to specific matters. The Closing Agreement is final and conclusive, and binds both parties to the matters agreed upon (absent fraud/malfeasance). / / 9 OVERVIEW OF IRS PROCEDURES UNAGREED CASES ON AT APPEALS If unable to reach satisfactory settlement at Appeals, then Appeals will prepare a 90-day letter, and the taxpayer will have 90 days to file a petition with the Tax Court for redetermination CASES DOCKETED BEFORE TAX COURT If a case under consideration in Appeals is docketed in the Tax Court and an agreement is reached as to the issues involved, the disposition of the case is made by stipulation of the agreed deficiency filed with the Tax Court. / / 10 5

6 OVERVIEW OF IRS PROCEDURES STATUE OF LIMITATIONS ON REFUNDS/CREDITS Generally, a claim for refund/credit must be filed within the later of 3 years from the date the taxpayer s return was filed or 2 years from the date the tax was paid. SOL may be extended when the IRS and taxpayer have agreed to extend the period of assessment by filing Form 872, Consent to Extend the Time to Assess Tax. In these cases, the period for filing a claim will not expire prior to 6 months after the expiration of the period in which the assessment can be made. JOINT COMMITTEE CASES Refunds or credits in excess of $2,000,000 cannot be made by the IRS until a report is submitted to and reviewed by the Joint Committee on Taxation, which is composed of 10 members of Congress. Refunds or credits may not be made until 30 days after the report is submitted. / / 11 REPORTING FEDERAL CHANGES 6

7 ISSUES What constitutes a federal change or a final determination? When and how do I file? Scope of State Review Secondary Imports of RARs POSSIBLE CONSEQUENCES OF NOT TIMELY REPORTING Negligence and failure to file penalties Additional interest Loss of refunds, deductions or offsets Inaccurate attributes/carryovers Increased scrutiny by state revenue agencies Statutes remain open until filed Financial statement impact ASC 740 reserves / / 13 WHAT CONSTITUTES A FEDERAL CHANGE? Generally defined as a change to taxable income, but can also encompass a change to federal tax, e.g., foreign tax credits WHAT CONSTITUTES A FINAL DETERMINATION? Generally not defined in most states. Partial Settlements? First (or Last) of a Series of Events Date a Payment is Made or Refund Issued Filing Federal Amended Returns Signing an 870 AD Potential Interpretations of Final Determination Assessment Date Signing 870 Date Tax Court Enters Order Subject to No Further Appeal / / 14 7

8 DEFINITION OF FINAL DETERMINATION State statute defines Final Determination States with no definition or vague definition of Final Determination N/A WA Note OH: No state CIT, municipal income tax (post-2015) CA OR NV ID UT MT WY CO ND SD NE KS MN WI IA IL MO MI IN KY OH NY PA MD WV VA VT NH CT NJ DE DC ME RI MA AZ NM OK AR TN SC NC AK TX LA MS AL GA HI FL Source: COST Updated State Tax Administration Scorecard / / 15 SPECIFIC EXAMPLES OF FINAL DETERMINATION State California Colorado New Hampshire Texas Final Determination Definition I.R.S. Assessment Date First of a series of events Last of a series of events Date all administrative appeals with the IRS are exhausted or waived / / 16 8

9 INDIANA If there is a modification to federal tax return or federal tax liability, taxpayer must notify Department of such change within 180 days of such modification Taxpayer must file refund within 6 months of such modification Does the term modification include Notice of Proposed Adjustment and 30-day letter? > Are these proposed or final adjustments? Had taken the position that 6 month period for filing a refund claim based on federal change starts upon taxpayer s receipt of the IRS adjustment Included Notice of Proposed Adjustment and 30-day letter Taxpayers contended that the 30-day letter and proposed adjustments are not final and not a federal modification State has since dropped the issue / / 17 TIME LIMITS FOR REPORTING FEDERAL TAX CHANGES Report Changes within 30 days Report Changes within 60 days Report Changes within 90 days Notes CA: Within 6 months IA: 60 days for payment, 180 days for refund NH: Within 6 months NY: 120 days for combined reports OH: No state CIT; post-ty 2015, 60 days for amended municipal income tax returns OK: Within one year OR: 60 days if Portland/Multnomah County PA: Within 6 months (Tax Years pre-2013, 30 days) VA: Within one year. AK CA OR WA NV ID AZ UT HI MT WY CO NM Report Changes within 120 days Report Changes within 180 days or longer No statutory time limit to report federal changes No Corporate Income Tax TX ND MN VT NH SD WI MI NY MA CT RI IA PA NE NJ OH MD IL IN DE WV KS MO VA KY DC NC TN OK AR SC MS AL GA LA FL ME Source: COST Updated State Tax Administration Scorecard / / 18 9

10 TIME LIMITS FOR Different limits for reporting federal changes New York > 90 days for separate return filers (RAR and non-rar) > 120 days for combined filers (RAR), N.Y. Tax Law Sec. 211(3). DEFICIENCY V. REFUND Illinois Is there a difference in the time for reporting? Iowa Refund must be filed within 6 months of final federal audit adjustment Maryland Deficiency must be reported within 90 days Refund must be filed within 1 year / / 19 HOW TO FILE FEDERAL CHANGES Most states laws mandate the use of applicable form Original return marked Amended Alabama Form 20C with Amended Return box checked Alaska Recently announced Form 611X no longer accepted Sample bullet two-b (1) Amended return form (Year Specific v. Generic) Special forms for reporting federal changes Pennsylvania Form 128C (RAR and Non-RAR when Official Notice of Settlement has not yet been issued); Form RCT-101 for other Non-RAR Spreadsheet Calculations Refund claim form may also need to be filed / / 20 10

11 Common areas of state/federal non-conformity: IRC 199 (domestic production activities deduction) IRC 108(i) (elective COD income deferral) IRC 179 (bonus depreciation election) Other accelerated or bonus depreciation Subpart F (foreign income from controlled foreign corporations) Adjustments to loss carrybacks > Most states never allowed carrybacks of NOLs > State NOLs determined independently of federal NOLs Federal tax credits / / 21 SCOPE OF STATE REVIEW UPON NOTICE OF FEDERAL CHANGES Issues for consideration Does the federal change affect issues relating to apportionment? > Timing and recognition of revenues does the sales factor have to be adjusted? > Impact on compensation do the adjusted federal items have an impact on the payroll factor? > Impact on lease payments do the changes adjust the amount of lease deductions for real property that are allowed and impact the property factor? Is the state audit of federal changes limited only to federal changes or is the entire state return reopened to state audit (with a new SOL)? > Some states clearly limit income tax adjustments when the state s normal SOL has expired to just those adjustments impacted by the changes made by the IRS. Example of States: Alabama, Iowa, and Mississippi > Other states keep the period open for adjustment for non-irs changes to also be addressed. California is an example of a such a state / / 22 11

12 POLLING QUESTION WHEN REQUIRED TO FILE AN AMENDED STATE TAX RETURNS AFTER AN IRS AUDIT AND THE STATE S NORMAL STATUTE OF LIMITATIONS TO AUDIT HAS EXPIRED, SHOULD NON-IRS ADJUSTMENTS BE ALLOWED? A. ONLY IF IT IS ONE SIDED IN MY FAVOR (NOT THE STATE) B. NO, BOTH SIDES SHOULD BE LIMITED TO THE IRS ADJUSTMENTS C. YES, BOTH SIDES SHOULD MAKE ADJUSTMENTS TO GET TO THE CORRECT AMOUNT Only if it is one sided in m... 33% 33% 33% No, both sides should be... Yes, both sides should m... / / 23 STATUTE OF LIMITATIONS- WHEN FILED. When timely reporting federal changes, state statutes provide a statute of limitations on the state s ability to issue an assessment. The period of time varies from state to state, but on average a state has 1 to 2 years from the date the federal change is reported to issue an assessment, though some states like California have 4 years to issue an assessment. STATUTE OF LIMITATIONS- WHEN NOT FILED. When a taxpayer does not report a federal change, states generally take the position that an assessment may be issued at any time or at least within a certain period of time after the federal determination is discovered. For example, TX says that failure to notify the department of federal change allows the Department to assess within 1 year from the date that the final determination is discovered and provides for an additional 10% penalty of the tax that should have been reported in addition to all other penalties. / / 24 12

13 STATUTE OF LIMITATIONS- WHEN NOT FILED. MI- Provides that failure to notify the department of a federal change is considered fraud and will be assessed at any time within 2 years of the discovery of the fraud and will include penalties. MN- Provides that failure to notify the department of a federal change allows the department to assess tax within 6 years after the report should have been filed. CA- Provides that failure to notify the department of a federal change allows the department to assess tax at any time. State has four years from the date it receives sufficiently detailed information to apply the federal changes to California return. Sufficiently-detailed information is defined as enough information to allow state to compute the resulting California tax change. If all the SOLs have expired, CA may issue the assessment based on the open-ended statute law. However, if claim for refund is not timely filed within two years of the final federal determination the statute would bar the refund and the overpayment cannot be offset against any amounts due. / / 25 SECONDARY IMPACTS OF RARS What if federal change results in an overpayment of state taxes? Credits or refunds. Governed by statutes. SOLs may prohibit a refund but taxpayer should always be entitled to a credit for overpayments. (Tax policy view articulated by many courts is that a SOL limiting refunds is necessary to provide government with ability to appropriate budget for the current years while a credit can be projected and taken into account in later years.) City of Phila. v. City of Phila. Tax Rev. Bd. (to the use of Keystone Health Plan East, Inc.), Pa. Ct of Common Pleas for Phila. County No (1 st Jud. Dist. Civil) (Dec. 27, 2012) State modifications Some states require reporting of changes that resulted from audit adjustments in other states (similar to federal changes) RAR for consolidated group could require multiple notices for members of group in separate return states: > Problems with separate-entity state filings and federal consolidated limitations (e.g., contributions, NOLs, etc.) / / 26 13

14 SECONDARY IMPACTS OF RARS Changes to franchise tax base Do federal changes have impact on net worth base? > Pennsylvania book income adjustment? Do changes affect other taxes? Sales and use > Timing and recognition of revenue > Classification of revenue sources intangible v. tangible property sales (taxable v. non-taxable)? / / 27 PROTECTIVE CLAIMS FOR REFUND 14

15 PROTECTIVE CLAIMS FOR REFUND Filing for State Protective Claims for Refund May be Appropriate When: At federal level, taxpayer has competent authority to rely on the position from another jurisdiction Taxpayer is challenging the issue at the federal level Taxpayer files a federal amended return requesting a refund to preserve the right to refund upon adjustment WARNING: Watch state SOLs especially when filing Federal 1120x / / 29 OTHER CONSIDERATIONS 15

16 OTHER CONSIDERATIONS Starting point following dollar-value settlement of original return audit Offsetting refunds against deficiencies Interest and penalties: If federal deficiency reported, do interest and penalties run from the date of: Filing of the original federal/state return? The notice to the state of the federal change? Interest examples: > Florida: Interest accrues from filing date of the original state return. > Pennsylvania: Interest accrues 30 days after the taxpayer receives notice of the final federal determination. State underpayment penalties likely still apply > California Large Corporation Underpayment Penalty > Strict liability 20% penalty for underpayments of $1 million or more. / / 31 OTHER CONSIDERATIONS TAX AMNESTY AND FEDERAL CHANGES Overlap of tax amnesty, notification and overpayment or deficiency matters generally are not contemplated in tax amnesty programs Is taxpayer entitled to a refund of taxes he agreed not to dispute due to amnesty agreement? > Conway-Transportation Services, Inc., v. Hamer, 2013 IL App (1 st ) U, Ill. Ct. of Appeals (4 th Div.) (Jan. 17, 2013.) Taxpayer is subject to amnesty penalties due to failure to report: > Metropolitan Life Insurance v. Department of Revenue, Illinois S.Ct. Dkt (June 2013). / / 32 16

17 COMMON PRACTICES COMMON PRACTICES When in doubt about whether to report any federal change to the states, be conservative and report the changes sooner rather than later. Use the state prescribed return form and fill out all state forms as completely as possible Use certified or registered mail to file returns. Review the states SOL to determine if it is open for more than just federal changes and look for opportunities to offset. Be aware of state amnesty programs and provisions. When appropriate, ask the state taxing authority to offset overpayments and underpayments. Follow-up on all refund claims. Be aware of the statute of limitations on all notices and adjustments. When making payment, specifically request that it be applied to tax first, then interest in order to avoid interest continuing to accrue on the tax deficiency. / / 34 17

18 POLLING QUESTION AFTER THIS SESSION I KNOW: A. I WILL BE AN EXPERT IN FILING STATE AMENDED TAX RETURNS AFTER AN IRS AUDIT B. I NEED TO HIRE SOMEONE ELSE TO DEAL WITH THIS C. I NEED STEVE S AND MARILYN'S TO HELP ME FILE I will be an expert in filin... 33% 33% 33% I need to hire someone el.. I need Steve s and Marily... / / 35 THANK YOU MARILYN A. WETHEKAM HORWOOD MARCUS & BERK MWETHEKAM@SALTLAWYERS.COM STEVEN P. SPALETTO DELOITTE SSPALETTO@DELOITTE.COM 18