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State and Local Tax

Michigan Issues Guidance on New Law on Reporting Adjustments From Partnership Level Audits

by Peter G. Pupke, Esq.

The Michigan Department of Treasury has issued a Notice providing additional guidance regarding recent legislation that establishes a method for reporting and paying the Michigan income tax on final federal adjustments that arise from a partnership level audit or administrative adjustment request for partnerships subject to the federal Bipartisan Budget Act (BBA) of 2015. (Notice Regarding the Implementation of 2022 Public Act 148, Mich. Dept. Treas., 08/26/2022.)

New partnership adjustment reporting requirements.

 L. 2022, S248 (P.A. 148) (“2022 Public Act 148”) (see State Tax Update, 07/21/2022), created Chapter 18 within Part 3 of the Income Tax Act. Generally, Chapter 18 requires final federal adjustments that arise from a partnership level audit or administrative adjustment request for partnerships adjustments subject to the federal Bipartisan Budget Act (BBA) of 2015 to be reported and paid in one of two ways: the partnership may report adjustments to members, who must then separately report and pay their share of the applicable Michigan income tax due (i.e., the “push out” method) or, alternatively, the partnership may elect to report and pay any applicable Michigan income tax on behalf of its members (i.e., the “pay up” method).

Statutory deadlines.

There are important statutory deadlines under either reporting method, which include the following:

  1. A 90-day deadline: (a) for all partnerships to report certain preliminary information about the adjustments to the Department if it will be making the “pay up” election; and (b) for partnerships that “push out” adjustments, to report to each direct partner their share of the adjustments and, if applicable, pay any Michigan income tax on behalf of direct partners previously included on a composite return.
  2. A 180-day deadline: (a) for direct members of a partnership under the “push out” method, to report their share of adjustments to the Department and to pay the Michigan income tax owed on those adjustments; and (b) for a partnership that made the “pay up” election, to pay the collective Michigan income tax owed on those adjustments.

These deadlines are established by reference to the “final determination date” of the federal adjustment. For federal adjustments arising from a partnership level audit, the “final determination date” is generally defined to refer to the first day on which no federal adjustment arising from the audit remains to be finally determined, including the period of any subsequent appeal. In contrast, for federal adjustments arising from an administrative adjustment request, the “final determination date” is generally defined as the date on which the administrative adjustment request was filed with the Internal Revenue Service.

Effective date of new requirements—additional time to comply.

Chapter 18 is generally applicable for the reporting of certain federal adjustments for tax years beginning on and after January 1, 2018. Because PA 148 was also given retroactive effect, Chapter 18 will further apply to federal adjustments that have a “final determination date” both prior to and after its date of enactment. While this legislation has therefore created new and, in some cases, immediate obligations for taxpayers in Michigan, the forms, systems, and procedures required for fulfilling those obligations are yet to be fully implemented. Accordingly, the Department will provide additional time for taxpayers to comply with their statutory obligations, as outlined herein.

It is expected that the procedures for reporting federal adjustments under Chapter 18 will be available no later than January 1, 2023. As such, for any federal adjustment that is required to be reported under Chapter 18 and that has a “final determination date” prior to January 1, 2023, the Department will regard as timely any reports, elections, and payments that are made as if January 1, 2023, was the applicable “final determination date.” Penalty and interest on such adjustments is also automatically waived if reported timely pursuant to this Notice. Any payments, if applicable, are therefore only required to include the Michigan income tax that may be owed due to that federal adjustment. Effectively, the 90-day and 180-day deadlines referenced above will be treated as beginning on January 1, 2023, for any federal adjustment subject to Chapter 18 that has a “final determination date” prior to that date.

Limitations.

The Notice is limited to those federal adjustments that are subject to Chapter 18 and that have a “final determination date” prior to January 1, 2023. This will neither apply to any federal adjustments with a “final determination date” after December 31, 2022, nor any adjustment to a Michigan return that is required to be reported elsewhere under the Income Tax Act. Taxpayers who fail to report federal adjustments timely as provided in this Notice may be subject to interest and penalty, as applicable, under the Revenue Act.

Procedure for taxpayers opting to report federal adjustments immediately.

Notwithstanding this Notice, some taxpayers may wish to report their federal adjustments immediately and either pay any additional tax or claim any available refund. Before doing so, however, the State Partnership Representative must contact the Business Taxes Division for special instruction by calling (517) 636-6925. Partners will not be permitted to report, pay, or claim a refund unless the State Partnership Representative files the partnership’s federal adjustments report. There may be additional processing delays in handling these requests.

 

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