Federal Determination

A federal determination is defined as a change or correction of the amount of a federal tax due arising from an audit by the Commissioner of Internal Revenue.  If the amount of a taxpayer's federal adjusted gross income, filing status, personal exemptions, standard deduction, itemized deductions, or federal tax credit that affects the amount of State tax payable is changed or corrected by the Internal Revenue Service, the taxpayer must file a North Carolina return or amended return reflecting each change or correction within six months after being notified of the change or correction.

If a taxpayer fails to report the federal change within six months and the change increases the amount of State tax payable, the taxpayer must pay a failure to file penalty of 5% of the additional tax for each month, or part of a month the federal changes are not reported to the Department of Revenue (maximum 25% of the additional tax).  If a taxpayer fails to report the federal change within six months and the change decreases the amount of State tax payable, the taxpayer forfeits the right to any refund due by reason of the federal determination.

Under G.S. 105-241.10, if the taxpayer timely files a return or amended return to report the federal changes, the Department may assess additional tax that results only from adjustments related to the federal determination if the tax year is otherwise barred by statute.  Similarly, a taxpayer is allowed a refund only if the refund is the result of adjustments related to the federal determination if the tax year is otherwise barred by statute.

For tax years beginning on or after January 1, 2012, North Carolina determines your taxable income based upon your federal adjusted gross income and in prior years your North Carolina taxable income was determined based on your federal taxable income. Therefore, it is very important that you report to the Department any changes made to your federal return as soon as possible to receive any refund due or pay any additional tax owed to avoid a penalty.