A federal determination is defined as a change or correction arising from an audit by the Commissioner of Internal Revenue or an agreement of the U.S. competent authority, and the change or correction has become final. A federal determination is final when the determination is not subject to administrative or judicial review. In addition, audit findings are deemed final when (1) the taxpayer receives audit findings from the IRS for the tax period and the taxpayer does not timely file an administrative appeal with the IRS, or (2) the taxpayer consents to any of the audit findings for the tax period through a form or other written agreement with the IRS.
If a taxpayer's federal adjusted gross income, filing status, personal exemptions, standrad deduction, itemized deductions or federal tax credit are change or corrected by the Internal Revenue Service or agreement of the U.S. competent authority, and the change or correction affects the amount of State tax payable, the taxpayer must file an income tax return reflecting each change or correction from a federal determination within six months after being notified of the change or correction.
Refunds and Assessments after a Federal Determination
When a taxpayer timely files a return reflecting a federal determination:
When a taxpayer timely files a return reflectin a federal determination that affects the amount of State tax payable and the general statute of limitations for requesting a refund or proposing an assessment of the State tax has expired, the taxpayer is entitled to a refund or is liable for additional tax only if the refund or additional tax is the result of adjustments related to the federal determination.
The period for proposing an assessment of any tax due is one year after the return is filed or three years after the original return was filed or due to be filed, whichever is later.
When a taxpayer does not timely file a return reflecting a federal determination
If a taxpayer fails to report the federal determination within six months and the federal determination 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).
The period for proposing an assessment of any tax due is three years after the date the Secretary receives the final report of the federal determination. If a taxpayer fails to report the federal determination 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.
Federal Determinations and Fraud
When there is a federal determination and a fraud penalty is assessed by the federal government, the State may open the year on the basis of either fraud or the federal assessment. If a State return has not been filed, the 50% fraud penalty and the 5% per month (25% maximum) failure to file penalty may be assessed.