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State and Local Tax

New Jersey Adopts Federal Partnership Tax Audit Regime and Ends COVID-related Tax Extensions

by Peter G. Pupke

December 22, 2022, New Jersey Governor Murphy approved a bill that conforms the state with the federal partnership tax audit regime; ends COVID-related tax extensions; eliminates the requirement to affirmatively elect New Jersey S Corporation status, and administers these changes under the gross income tax and the corporation business tax. (L. 2022, A4295, effective 12/22/2022 and applying to any adjustments to a taxpayer’s federal taxable income on or after January 1, 2020 or as stated.)

Adoption of federal partnership tax audit regime.

Under the bill, a partnership must report any federal partnership audit adjustments made by the Internal Revenue Service pursuant IRC § 6225(a)(1) to the New Jersey Division of Taxation. The partners of the reviewed year must make payment of any New Jersey Gross Income Tax liability that results from the federal partnership audit adjustments reported on the Federal Adjustments Report, unless the partnership makes the election to pay tax on the partner’s behalf. Failure of the partnership, partner, tiered partner, indirect partner, or member to report or pay federal adjustments pursuant to IRC § 6225(a) and IRC § 6225(c) does not prevent the Director of the Division of Taxation from assessing the partnership, partner, tiered partner, indirect partner, or member for taxes they owe, using the best information available, in the event that the partnership, partner, tiered partner, indirect partner, or member fails to timely make any report or payment.

The bill requires a taxpayer, whose tax return filed with the Internal Revenue Service, or whose net income reported, is changed or corrected by any official of the United States government in any respect affecting a tax imposed by chapter 2 of Title 54A of the New Jersey Statutes, including a return or other similar report filed pursuant to IRC § 6225(c)(2), must within 90 days after the final federal adjustment and determination of the change or correction, submit to the Director the Federal Adjustments Report.

Except for the distributive share of adjustments that have been reported as required herein, partnerships and partners of the reviewed year must, within 90 days after the final determination date of the final federal adjustments arising from a federal partnership level audit or an administrative adjustment request, file a Federal Adjustments Report and make payments as required under N.J. Rev. Stat. § 54A:5-4(b).

Upon the filing of a Federal Adjustments Report, the Director must examine a taxpayer’s return, determine any additional tax or refund that may be due, and must notify the taxpayer. Any additional tax must be paid within 15 days after the Federal Adjustments Report is filed together with interest from the original due date of the return for the taxable year to the date of payment of the additional tax.

Tax may be assessed against the partnership, direct or indirect partners, or both, within two years of the time that a partnership files a Federal Adjustments Report that includes Final Federal Adjustments from a federal partnership audit or administrative adjustments request that would result in additional New Jersey income tax for one or more direct or indirect partners.

If a partnership files a Federal Adjustments Report with final federal adjustments resulting from a partnership audit or administrative adjustments request that do not result in a federal imputed underpayment, and which are not taken into account by the partnership in the federal adjustment year partnership return, then the partners may claim a credit or refund of the related State tax by filing an amended return or other schedule as required by the Director. The amount of such credit or refund cannot exceed the amount of the reduction in New Jersey tax attributable to such final federal adjustments.

COVID-related extensions ended.

The bill also ends, effective December 22, 2022, the COVID-19 deadline extensions to the statute of limitations for taxes due and the state’s interest payments on overpaid tax.

S corporation status.

The bill eliminates, effective December 22, 2022, the requirement that a taxpayer which qualifies as a Subchapter S Corporation for federal tax purposes affirmatively elect New Jersey S Corporation status.

 

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