by Peter G. Pupke, Esq.
On July 19, 2022, Michigan Governor Gretchen Whitmer signed legislation that enacts a new Chapter 18 to the Michigan Income Tax Act that requires partnerships and partners to report final Federal adjustments arising from a partnership-level audit or an administrative adjustment request and to make payments as required; specifies that with respect to actions specified under the bill, the State partnership representative for the reviewed year has the sole authority to act on behalf of the partnership; allows the Department of Treasury to establish reasonable qualifications and procedures for designating a person, other than the Federal representative, to be the State representative; prescribes the method for reporting final Federal adjustments; prescribes the procedures for an audited partnership that chose to make an election and pay the applicable taxes under Chapter 18; specifies that if a taxpayer filed a Federal adjustments report or an amended return within the time period specified, the Department cannot assess additional tax, interest, and penalties; and allows a taxpayer that expected to owe additional tax as a result of a partnership-level audit to make payments before the report due date. The bill also amends the Income Tax Act to specify that requirements to file an amended return do not apply to the reporting of a final Federal adjustment arising from a partnership level audit or an administrative adjustment request required to be reported under Chapter 18. (L. 2022, S248 (P.A. 148), effective retroactively for all tax years beginning on and after 01/01/2018.)
Partnership and partnership-level audits. Under Chapter 18, except for adjustments required to be reported for Federal purposes by taking those adjustments into account in the partnership return for the year of adjustment, partnerships and partners must report final Federal adjustments arising from a partnership-level audit or an administrative adjustment request, and must make payments as required. With respect to an action required or permitted to be taken and any other proceeding or action permitted under Chapter 18 or the Revenue Act, the State partnership representative for the reviewed year has the sole authority to act on behalf of the partnership and the partnership’s direct partners and indirect partners would be bound by those actions. The representative for the reviewed year is the partnership’s Federal partnership representative unless the partnership designates another person as its State representative. The Department may establish reasonable qualifications and procedures for designating a person, other than the Federal representative, to be the State representative.
Final Federal adjustments. Except for final Federal adjustments subject to a properly made election as described below, final Federal adjustments must be reported as follows:
- Within 90 days after the final determination date, the partnership must do all of the following: (1) file a completed Federal adjustments report, including information as required by the Department; (2) report to each of its direct partners for the reviewed year their distributive share of the final Federal adjustments including information as required by the Department; and (3) submit a payment on behalf of any nonresident partner previously included on a composite return for the reviewed year for the additional amount of tax that would have been due had the final Federal adjustment been reported correctly.
- If the increase in the amount of tax due that results from the partnership level audit is $25 or more, within 180 days after the final determination date, each direct partner for that reviewed year that was a corporate partner, resident partner, or nonresident partner that is not included in the payment on behalf of a nonresident partner must file a Federal adjustments report reporting that partner’s share of the adjustments reported and pay any additional amount of tax due as if the adjustments had been properly reported, plus any penalty and interests as provided under the Revenue Act.
If the Department determines that the taxpayer has overpaid the tax imposed by the Income Tax Act, a credit or refund of the overpayment must be issued immediately.
Chapter 18 elections. The bill allows a partnership that is audited to elect to report any changes at the partnership level rather than the level of individual partners and that the partnership consent to any necessary enforcement actions under the Revenue Act. An audited partnership that makes the election as specified in the bill is subject to the laws related to reporting, assessment, payment, and collection of tax calculated under the Income Tax Act and the Revenue Act and, within 90 days after the final determination date, must file a completed Federal adjustments report and notify the Department that it is making the election.
An audited partnership that makes an election, within 180 days after the final determination date, must exclude from final Federal adjustments the distributive share of those adjustments attributed to direct exempt partners not subject to the tax under the Income Tax Act and must pay an amount equal to the sum of the following, along with any penalty and interest instead of taxes owed by its direct and indirect partners:
- For the distributive shares of the remaining final Federal adjustments that are attributed to direct corporate partners, determine the amount allocated or apportioned to the State and multiply that share amount by the tax rate imposed for the reviewed year.
- For the distributive shares of the remaining final Federal adjustments that are attributed to direct tiered partners, as follows: (a) the distributive shares that are attributed to indirect corporate partners and that are allocated or apportioned to the State under Part 2 of the Income Tax Act and multiply that amount by the tax rate imposed under Mich. Comp. Laws Ann. § 206.623 (6.0%) for the reviewed year; (b) the distributive shares that are attributed to indirect resident or nonresident partners and that are allocated or apportioned to the State under Part 1 of the Income Tax Act and multiply that amount by the tax rate under Mich. Comp. Laws Ann. § 206.51 (4.25%) for the reviewed year; and (c) for the remaining distributive shares of the final Federal adjustments that are not attributed as specified previously, determine the amount allocated or apportioned to the State under Part 2 of the Income Tax Act and multiply that amount by the tax rate imposed under Mich. Comp. Laws Ann. § 206.623 for the reviewed year.
- For the distributive shares of the remaining final Federal adjustments that are attributed to direct partners subject to tax under Part 1 of the Income Tax Act, determine the amount of shares that are allocated and apportioned to the State and multiply that share amount by the tax rate imposed under Mich. Comp. Laws Ann. § 206.51 for the reviewed year.
In determining the amount of the tax described above, if reasonably identified by the audited partnership, final Federal adjustments must not include the distributive share of the final Federal adjustments attributed to any direct or indirect corporate partner that is unitary with the audited partnership for apportionment purposes.
In accordance with procedures adopted by the Department, an audited partnership or tiered partner may submit an application to the Department for an alternative reporting and payment method within the time allowed for an election. If the application is approved, an audited partnership or tiered partner must enter into an agreement with the Department to use an alternative reporting and payment method, including applicable time requirements or any other provision, if the audited partnership or tiered partner demonstrates that the requested method will reasonably provide for the reporting and payments of taxes, penalties, and interest due.
An election to report at the partnership level, or through alternative reporting, is irrevocable unless the Department, in its discretion, determines otherwise. If properly reported and paid by the audited partnership or tiered partner, amounts paid under an election is considered paid instead of taxes owed by its direct and indirect partners, to the extent applicable, on the same final Federal adjustments. The direct partners or indirect partners may not take a deduction or credit under the Income Tax Act against this amount or claim a refund of the amount. These provisions do not preclude a direct resident partner from claiming a credit against taxes paid to the State under the Income Tax Act, for any amounts paid by the audited partnership or tiered partner on the resident partner’s behalf to another state or local tax jurisdiction. If a partnership or tiered partner fails to make a timely report or payment as required, the Department may assess direct partners or indirect partners for taxes owed as determined based on the best information available.
Penalties and advance payments. If a taxpayer files a Federal adjustments report or an amended return as required and within the time period specified in the bill, the Department may not assess additional tax, interest, and penalties arising from final Federal adjustments after the limitations period specified in the Revenue Act expires. If a taxpayer fails to file the Federal adjustments report within the time period specified or the taxpayer fils a report that omits adjustments or understates the correct amount of tax owed, the Department may assess additional tax, interest, and penalties arising from those adjustments if the Department issues a notice of assessment to the taxpayer within six years after the final determination date.
A taxpayer that expects to owe additional tax as a result of a pending partnership level audit may make payments, as prescribed by the Department, before the due date of the Federal adjustments report. The Department must credit any payments against any tax liability ultimately found to be due under the report and any payments made limit the accrual of further statutory interest on that amount.
Except for final Federal adjustments required to be reported for Federal purposes under the Internal Revenue Code (IRC), a taxpayer may file a claim for a refund or credit of the overpayment of the tax arising from Federal adjustments made by the Internal Revenue Service before the statute of limitations expires. For a taxpayer that is a partnership, any claim for a refund or credit must be made within two years of the final determination date of the Federal adjustment.
The time periods provided in the bill may be extended under either of the following: (1) automatically, upon written notice to the Department, by 60 days for an audited partnership or tiered partner that has 10,000 or more direct partners; or (2) by written agreement between the taxpayer and the Department.
Rules. The Department may promulgate rules to implement the bill and may establish procedures and interim time periods for the reports and payments required by tiered partners and their partners and for making elections. To the extent practicable, the Department must establish rules and regulations that conform as closely as possible to the Federal rules and procedures.
Amended returns. A taxpayer generally must file an amended return with the Department showing any final alteration in, or modification of, the taxpayer’s Federal income tax return that affects the taxpayer’s taxable income or tax base and of any similarly related recomputation of tax or determination of deficiency under the IRC. The amended return must be filed within 120 days after the final alteration, modification, recomputation, or determination of deficiency. Under the bill, the amended return instead must be filed within 180 days after the final determination date. Also, the amended return provisions do not apply to the reporting of a final Federal adjustment arising from a partnership level audit or an administrative adjustment required to be reported under Chapter 18.
For tax years that began on and after January 1, 2018, a partnership that is not subject to Chapter 18, but has determined that the partner’s share of income, deductions, and credits previously reported to its partners and included in a filed return required adjustment, may, at the discretion of the Department, file a report with the Department and pay the tax due or claim a refund on behalf of its partners in a manner similar to the process set forth in Chapter 18.
This article was originally published on July 21, 2022, in Checkpoint’s State Tax Update.
