5866a. Reporting adjustments to federal taxable income and federal partnership audits
(a) Definitions. As used in this section:
(1) “Administrative adjustment request” means an administrative adjustment request filed by a partnership under 26 U.S.C. § 6227.
(2) “Audited partnership” means a partnership subject to a partnership-level audit resulting in a federal adjustment.
(3) “Corporate partner” means a partner that is subject to tax under chapter 151, subchapter 3 of this title.
(4) “Direct partner” means a partner that holds an interest directly in a partnership or pass-through entity.
(5) “Exempt partner” means a partner that is exempt from taxation under this chapter but not an entity with federal exempt status having taxable income under subdivision 5811(18) of this title.
(6) “Federal adjustment” means a change to an item or amount determined under the Internal Revenue Code that is used by a taxpayer to compute tax owed, whether that change results from action by the Internal Revenue Service, including a partnership-level audit, or the filing of an amended federal return, federal refund claim, or an administrative adjustment request by the taxpayer. A federal adjustment is positive to the extent that it increases State taxable income as determined under this chapter and is negative to the extent that it decreases State taxable income as determined under this chapter.
(7) “Federal adjustments report” includes methods or forms required by the Commissioner for use by a taxpayer to report final federal adjustments, including an amended tax return, information return, or uniform multistate report.
(8) “Federal partnership representative” means the person that the partnership designates for the taxable year as the partnership’s representative or the person that the Internal Revenue Service appoints to act as the federal partnership representative pursuant to 26 U.S.C. § 6223(a).
(9) “Final determination date” means the following:
(A) Except as provided in subdivisions (B) and (C) of this subdivision (a)(9), if the federal adjustment arises from an audit or other action by the Internal Revenue Service, “final determination date” means the first day on which no federal adjustments arising from that audit or other action remain to be finally determined, whether by Internal Revenue Service decision with respect to which all rights of appeal have been waived or exhausted, by agreement, or, if appealed or contested, by a final decision with respect to which all rights of appeal have been waived or exhausted. For agreements required to be signed by the Internal Revenue Service and the taxpayer, the “final determination date” means the date on which the last party signed the agreement.
(B) For federal adjustments arising from an audit or other action by the Internal Revenue Service, if the taxpayer filed as a member of an affiliated group electing to file a consolidated return under subsection 5862(c) of this title or filed as a member of a unitary combined group under subsection 5862(d) of this title, the “final determination date” means the first day on which no related federal adjustments arising from that audit remain to be finally determined, as described in subdivision (A) of this subdivision (a)(9), for the entire group.
(C) If the federal adjustment results from filing an amended federal return, a federal refund claim, or an administrative adjustment request, or if it is a federal adjustment reported on an amended federal return or other similar report filed pursuant to 26 U.S.C. § 6225(c), the “final determination date” means the day on which the amended return, refund claim, administrative adjustment request, or other similar report was filed.
(10) “Final federal adjustment” means a federal adjustment after the final determination date for that federal adjustment has passed.
(11) “Indirect partner” means a partner in a partnership or pass-through entity that itself holds an interest directly, or through another indirect partner, in a partnership or pass-through entity.
(12) “I.R.C.” means the Internal Revenue Code of 1986, as codified under 26 U.S.C. subtitles A–K, and applicable regulations as promulgated by the U.S. Department of the Treasury. To the extent that the terms used in this section are not defined under this section, it is the intent of the General Assembly to conform to the definitions and terminology used in the amendments to the I.R.C., subtitle F, chapter 63 pertaining to the comprehensive partnership audit regime contained in the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, as amended, and this section shall be interpreted accordingly.
(13) “Nonresident partner” means an individual, trust, or estate partner that is not a resident partner.
(14) “Partner” means a person that holds an interest, directly or indirectly, in a partnership or other pass-through entity.
(15) “Partnership” means an entity subject to taxation under 26 U.S.C. subtitle A, chapter 1, subchapter K.
(16) “Partnership-level audit” means an examination by the Internal Revenue Service at the partnership level pursuant to 26 U.S.C. subtitle F, chapter 63, subchapter C that results in federal adjustments.
(17) “Pass-through entity” means an entity other than a partnership that is not subject to tax under section 5822 or 5832 of this title.
(18) “Reallocation adjustment” means a federal adjustment resulting from a partnership-level audit or an administrative adjustment request that changes the shares of one or more items of partnership income, gain, loss, expense, or credit allocated to direct partners. A positive reallocation adjustment means the portion of a reallocation adjustment that would increase federal income for one or more direct partners, and a negative reallocation adjustment means the portion of a reallocation adjustment that would decrease federal income for one or more direct partners.
(19) “Resident partner” means an individual, trust, or estate partner that is a resident under section 5811 of this title for the relevant tax period.
(20) “Reviewed year” means the taxable year of a partnership that is subject to a partnership-level audit from which federal adjustments arise.
(21) “Taxpayer” means any person or entity required to file a return or pay tax under this chapter and, unless the context clearly indicates otherwise, includes a partnership, including a tiered partner of a partnership, subject to a partnership-level audit and a partnership, including a tiered partner of a partnership, that has made an administrative adjustment request.
(22) “Tiered partner” means any partner that is a partnership or pass-through entity.
(23) “Unrelated business taxable income” has the same meaning as in 26 U.S.C. § 512.
(b) Reporting adjustments to federal taxable income; general rule.
(1) Except in the case of final federal adjustments that are required to be reported by a partnership and its partners using the procedures in subsection (c) of this section, a taxpayer shall report and pay any Vermont tax due with respect to the following final federal adjustments:
(A) arising from an audit or other action by the Internal Revenue Service;
(B) reported by the taxpayer on a timely filed amended federal income tax return, including a return or other similar report filed pursuant to 26 U.S.C. § 6225(c)(2); or
(C) a federal claim for refund.
(2) A taxpayer shall report and pay any tax due under this subsection by filing a federal adjustments report with the Commissioner for the reviewed year and, if applicable, paying the additional Vermont tax owed not later than 180 days after the final determination date.
(c) Reporting federal adjustments; partnership-level audit and administrative adjustment request. Except for negative federal adjustments required under federal law or regulations to be taken into account by the partnership in the partnership return for the adjustment or other year, and the distributive share of adjustments reported as required under subsection (b) of this section, partnerships and partners shall report final federal adjustments arising from a partnership-level audit or an administrative adjustment request and make payments as required under this subsection (c).
(1) State partnership representative.
(A) With respect to an action required or permitted to be taken by a partnership under this subsection (c) and a petition for a hearing under sections 5883, 5884, or 5885 of this title with respect to that action, the State partnership representative for the reviewed year shall have the sole authority to act on behalf of the partnership, and the partnership’s direct partners and indirect partners shall be bound by those actions.
(B) The State partnership representative for the reviewed year is the partnership’s federal partnership representative unless the partnership designates in writing another person as its State partnership representative.
(C) The Commissioner may establish reasonable qualifications and procedures for designating a person, other than the federal partnership representative, to be the State partnership representative.
(2) Reporting and payment requirements for partnerships subject to a final federal adjustment and their direct partners. Final federal adjustments subject to the requirements of this subsection, except for those subject to an election that is properly made under subdivision (3) of this subsection, shall be reported as follows:
(A) Not later than 90 days after the final determination date, the partnership shall:
(i) File a completed federal adjustments report with the Commissioner, including any other information required by the Commissioner. The federal adjustments report shall:
(I) Identify each partner during the reviewed year.
(II) Specify each item addressed by, and the amount included in, the final federal adjustment.
(III) Explain how the final federal adjustment needs to be modified for State tax purposes to reflect relevant differences between federal and State law.
(IV) Provide any other information related to the final determination or modification as the Commissioner may require. If the audited partnership has received an approved modification, the audited partnership shall notify the Commissioner of this approval not later than 90 days after the date of approval. An audited partnership that fails to meet the filing requirements under this subsection (c) shall be subject to the penalties for failure to file under section 3202 of this title. The statute of limitations for assessing a partner or an audited partnership pursuant to this section shall be tolled in any instance in which the audited partnership has not provided the Commissioner with the notice and filing required by this subsection (c).
(ii) Notify each of its direct partners of their distributive share of the final federal adjustments.
(iii) File an amended composite return for direct partners as required under subsections 5914(a) and (b) and 5920(a) and (b) of this title and, as applicable, an amended withholding return for direct partners as required under subchapter 4 of this chapter and pay the additional tax that would have been due had the final federal adjustments been reported properly.
(B) Not later than 180 days after the final determination date, each direct partner that is taxed under sections 5822 and 5832 of this title shall:
(i) file a federal adjustments report reporting their distributive share of the adjustments reported to them under subdivision (A)(ii) of this subdivision (c)(2) as required under this chapter; and
(ii) pay any additional amount of tax that would have been due if final federal adjustments had been reported properly, plus any penalty and interest due under section 3202 of this title, and less any credit for related amounts paid or withheld and remitted on behalf of the direct partner under subdivision (A)(iii) of this subdivision (c)(2).
(3) Election; partnership pays. Subject to the limitations under subdivision (C) of this subdivision, an audited partnership making an election under this subdivision shall do the following:
(A) Not later than 90 days after the final determination date, file a completed federal adjustments report as required by subdivision (2) of this subsection (c) and notify the Commissioner that it is making the election under this subdivision (3).
(B) Not later than 180 days after the final determination date, pay an amount, determined as follows, in lieu of taxes owed by its direct and indirect partners:
(i) Exclude from final federal adjustments the distributive share of these adjustments reported to a direct exempt partner not subject to tax under this chapter.
(ii) For the total distributive shares of the remaining final federal adjustments reported to direct corporate partners subject to tax under section 5832 of this title, apportion and allocate the adjustments as provided under section 5833 of this title, and multiply the result by the highest tax rate imposed under section 5832 of this title.
(iii) For the total distributive shares of the remaining final federal adjustments reported to nonresident direct partners subject to tax under this chapter, determine the amount of the adjustments that is Vermont-source income, and multiply the result by the highest tax rate imposed under section 5822 of this title.
(iv) For the total distributive shares of the remaining final federal adjustments reported to tiered partners:
(I) Determine the amount of the adjustments that is of a type that it would be subject to sourcing to Vermont under this chapter and then determine the portion of the amount that would be sourced to Vermont.
(II) Determine the amount of the adjustments that is of a type that it would not be subject to sourcing to Vermont by a nonresident partner under this chapter.
(III) Determine the portion of the amount determined in subdivision (iv)(II) of this subdivision (3)(B) that can be established as properly allocable to nonresident indirect partners or other partners not subject to tax on the adjustments or that can be excluded under procedures for modified reporting and payment method allowed under subdivision (5) of this subsection (c).
(v) Multiply the total of the amounts determined in subdivisions (iv)(I) and (iv)(II) of this subdivision (3)(B) reduced by the amount determined in subdivision (iv)(III) of this subdivision (3)(B) by the highest tax rate under section 5822 of this title.
(vi) For the total distributive shares of the remaining final federal adjustments reported to resident direct partners subject to tax under section 5822 of this title, multiply the amount reported by the highest tax rate under section 5822 of this title.
(vii) Add the amounts determined in subdivisions (ii), (iii), (v), and (vi) of this subdivision (3)(B), along with penalty and interest as calculated under subsection 3202(a) and subdivisions 3202(b)(2) and (b)(3) of this title.
(C) Final federal adjustments subject to the election under this subdivision (c)(3) exclude:
(i) the distributive share of final audit adjustments that, under subsection 5862(d) of this title, must be included in the unitary combined business income of any direct or indirect corporate partner, provided that the audited partnership can reasonably determine this; and
(ii) any final federal adjustments resulting from an administrative adjustment request.
(D) An audited partnership that is not otherwise subject to any reporting or payment obligations to Vermont and that makes an election under this subdivision (c)(3), consents to be subject to Vermont laws related to reporting, assessment, payment, and collection of Vermont tax calculated under the election.
(4) Tiered partners. The direct and indirect partners of an audited partnership that are tiered partners, and all partners of those tiered partners that are subject to tax under this chapter, are subject to the reporting and payment requirements of subdivision (2) of this subsection, and the tiered partners are entitled to make the elections provided in subdivisions (3) and (5) of this subsection. The tiered partners or their partners shall make required reports and payments not later than 90 days after the time for filing and furnishing statements to tiered partners and their partners as established under 26 U.S.C. § 6226 and the associated regulations. The Commissioner may adopt rules to establish procedures and interim time periods for the reports and payments required by tiered partners and their partners and for making the elections under this subsection.
(5) Alternative reporting and payment methods.
(A) Pursuant to any procedures established by the Commissioner, an audited partnership or tiered partner may request approval by the Commissioner to utilize alternative reporting and payment methods, including modifying applicable time requirements and any other requirement of this subsection (c), provided that:
(i) the audited partnership or tiered partner demonstrates to the Commissioner’s satisfaction that the requested method will reasonably provide for the reporting and payment of taxes, penalties, and interest due under this subsection (c); or
(ii) the audited partnership or tiered partner establishes to the Commissioner’s satisfaction that their direct partners have agreed to allow a refund of the State tax to the entity.
(B) A request for approval of alternative reporting and payment methods by the Commissioner shall be made by the audited partnership or tiered partner within the time for election provided in subdivision (3) or (4) of this subsection (c), as applicable.
(6) Effect of election by audited partnership or tiered partner and payment of amount due.
(A) The election made pursuant to subdivision (3) or (5) of this subsection (c) is irrevocable unless the Commissioner, at the Commissioner’s discretion, determines otherwise.
(B) If reported properly and paid by the audited partnership or tiered partner, the amount determined under subdivision (3)(B) of this subsection (c) or under an optional election under subdivision (5) of this subsection (c) shall be treated as paid in lieu of taxes owed by its direct and indirect partners, to the extent applicable, on the same final federal adjustments. The direct or indirect partners shall not be eligible to take any deduction or credit for this amount or claim a refund of the amount in this State. Nothing in this subdivision (6) shall preclude a direct resident partner from claiming a credit against taxes paid or any amounts paid by the audited partnership or tiered partner on the resident partner’s behalf to another state or local tax jurisdiction pursuant to section 5825 of this title.
(7) Failure of audited partnership or tiered partner to report or pay. Nothing in this subsection prevents the Commissioner from using the best information available to assess a direct or indirect partner for taxes owed by those partners if a partnership or tiered partner fails, for any reason, to make any report or payment required by this subsection in a timely manner.
(d) De minimis exception. The Commissioner may, at the Commissioner’s discretion, adopt rules to establish a de minimis amount below which a taxpayer shall not be required to comply with subsections (b) and (c) of this section.
(e) Assessments of additional tax, interest, and penalties arising from adjustments to federal taxable income; statute of limitations. The Commissioner shall assess additional tax, interest, and penalties arising from final federal adjustments arising from an audit by the Internal Revenue Service, including a partnership-level audit, as reported by the taxpayer on an amended federal income tax return, or as part of an administrative adjustment request, by the following dates:
(1) Timely reported federal adjustments. If a taxpayer files with the Commissioner a federal adjustments report or an amended tax return as required within the period prescribed in subsection (b) or (c) of this section, the Commissioner may assess any amounts, including in-lieu-of amounts, taxes, interest, and penalties arising from those federal adjustments, if a notice of the assessment to the taxpayer is issued not later than:
(A) the expiration of the limitations period prescribed in section 5882 of this title; or
(B) the expiration of the one-year period following the date of filing the federal adjustments report with the Commissioner.
(2) Untimely reported federal adjustments. If the taxpayer fails to file the federal adjustments report within the period prescribed in subsection (b) or (c) of this section, as appropriate, or if the federal adjustments report filed by the taxpayer omits final federal adjustments or understates the correct amount of tax owed, the Commissioner may assess amounts or additional amounts, including in-lieu-of amounts, taxes, interest, and penalties arising from the final federal adjustments, if the Commissioner mails a notice of the assessment to the taxpayer by a date that is the latest of one of the following:
(A) the expiration of the limitations period prescribed in section 5882 of this title;
(B) the expiration of the one-year period following the date of filing the federal adjustments report with the Commissioner; or
(C) absent fraud, the expiration of the six-year period following the final determination date.
(f) Estimated tax payments made during a pending federal audit. A taxpayer may make estimated payments, according to the process prescribed by the Commissioner, of the tax expected to result from a pending Internal Revenue Service audit and prior to the due date of the federal adjustments report, without filing the report with the Commissioner. The estimated tax payments shall be credited against the final Vermont tax liability and shall limit the accrual of further statutory interest on that amount. If the estimated tax payments exceed the final Vermont tax liability and statutory interest ultimately determined to be due, the taxpayer is entitled to a refund or credit for the excess, provided the taxpayer files a federal adjustments report or claim for refund or credit of tax paid pursuant to section 5884 of this title, not later than one year following the final determination date. As used in this subsection, “final Vermont tax liability” means the amount of any Vermont tax liability ultimately found to be due to the State.
(g) Claims for refund or credits of tax paid arising from final federal adjustments made by the Internal Revenue Service or by administrative adjustment request.
(1) Except for negative federal adjustments required by federal law to be taken into account by the partnership in the partnership return for the adjustment or other year, a taxpayer may file a claim for refund or credit of tax paid arising from final federal adjustments on or before the later of:
(A) the expiration of the last day for filing a claim for refund or credit of tax paid pursuant to section 5884 of this title, including any extensions; or
(B) one year from the date a federal adjustments report prescribed in subsection (b) or (c) of this section, as applicable, was due to the Commissioner, including any extensions pursuant to subsection (h) of this section.
(2) The federal adjustments report shall serve as the means for the taxpayer, including a partnership and its tiered partners, direct partners, and indirect partners, to report additional tax due, report a claim for refund or credit of tax paid, and make other adjustments, including to its net operating losses, resulting from adjustments to the taxpayer’s federal taxable income. Any refund granted to the partnership under subsection (c) of this section shall be in lieu of State tax paid that may be owed to the partners.
(h) Scope of adjustments and extensions of time.
(1) Unless otherwise agreed in writing by the taxpayer and the Commissioner, any adjustments made by the Commissioner or the taxpayer after the expiration of the limitations periods prescribed in sections 5882 and 5884 of this title are limited to changes to the taxpayer’s tax liability arising from federal adjustments.
(2) The time periods provided for in this subsection may be extended:
(A) automatically by 60 days for an audited partnership or tiered partner that has 10,000 or more direct partners, upon written notice to the Commissioner; or
(B) by written agreement between the taxpayer and the Commissioner.
(3) Any extension granted under this subsection for filing the federal adjustments report extends the last day prescribed by law for assessing any additional tax arising from the adjustments to federal taxable income and the period for filing a claim for refund or credit of taxes.
(i) Commissioner’s rulemaking authority. The Commissioner may adopt rules or issue other guidance to implement or explain the provisions of this section. The rules adopted or guidance issued with regard to this section may apply the principles set forth in 26 U.S.C. subtitle F, chapter 63, subchapter C; federal regulations; and other related guidance issued by the U.S. Department of the Treasury in order to prevent the omission or duplication of State tax due as the result of a partnership-level audit and to account for differences between federal and State law.
Added 2021, No. 179 (Adj. Sess.), § 13, eff. Jan. 1, 2022; amended 2023, No. 6, § 380, eff. July 1, 2023.
