Introduction

Changes to federal taxable income associated with previously filed state income tax returns trigger an involved and arduous reporting process for multistate taxpayers. In this installment of A Pinch of SALT, we explore the complex world of state taxr eporting associated with federal tax changes and review the various considerations facing taxpayers when attempting to accurately and timely report federal adjustments. We suggest some ideas for simplification and clarification associated with reporting federal tax changes, including clarity as to when reporting obligations arise and the effect on otherwise closed state statutes of limitations.

Background

Overview of the Federal Audit ProceduresHaving an understanding of the disposition of the audit at the federal level is important to the reporting of federal adjustments at the state level.

Generally, after an Internal Revenue Service examination is completed, proposed changes to the taxpayer’s return are reflected in a revenue agent’sreport (RAR) is written. If the taxpayer agrees with the proposed adjustments, the IRS will request that the taxpayer sign a Form 870, ‘Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.' Without the Form 870, the IRS is precluded from making an assessment or refund without first following deficiency procedures.