The requirement to report federal changes applies whenever there is a “Final Determination” that results in a change to a taxpayer’s federal taxable income. A Final Determination includes (i) the final resolution of a federal tax audit, (ii) entering into a closing agreement with the IRS, and (iii) a final decision by a federal court.

Following a Final Determination, a taxpayer has 180 days to file a Report of Change, in a form to be developed by the Department. The Ordinance allows the Department to impose penalties, in amounts to be established by regulation, for the failure to timely file a required Report of Change.

Upon the filing of a Report of Change reporting an increase in taxable income, the Department will have the ability to assess additional tax, interest and/or penalties for the period at issue until the later of (i) the expiration of the otherwise applicable statute of limitations, or (ii) one year from the date the Report of Change is filed. If a taxpayer fails to timely file a Report of Change but the Department is notified of the change by another taxing authority, the Department can assess additional tax, interest and/or penalties for a period of one year following such notification.

If a taxpayer timely files the Report of Change reporting a decrease in taxable income, the taxpayer will be able request a refund or credit (presumably through the ordinary refund claim process), even if the statute of limitations for a refund or credit has expired.

In the case of both increases to tax liability and refunds/credits, if the applicable statute of limitations has expired, any adjustments to Philadelphia tax liability are limited to adjustments arising directly from the Final Determination reported on the Report of Change; the statute of limitations is not otherwise opened for either assessments or claims for refunds or credits.

The new requirement is applicable to all City taxpayers and therefore a Report of Change must be filed by individuals, entities that are corporations for City tax purposes, and entities that are partnerships for City tax purposes (including limited liability companies that are treated as partnerships). The Ordinance does not list the specific types of City taxes that are covered but, because the Final Determination must be based on federal taxable income, affected Philadelphia taxes include the Earnings Tax, School Income Tax, Business Income and Receipts Tax and Net Profits Tax.

Many states have similar reporting requirements regarding changes to federal income but all Philadelphia taxpayers should be aware of this new rule to avoid potential penalties.