KRS § 141.211 — KY Code / Title XI / Chapter 141 / Section 141.211
141.211 Audits performed and additional tax assessed at the partnership level
Status: in_force

141.211 Audits performed and additional tax assessed at the partnership level.

(1) As used in this section:

(a) "Administrative adjustment request" means an administrative adjustment

request filed by a partnership under Section 6227 of the Internal Revenue

Code;

(b) "Audited partnership" means a partnership subject to a partnership level audit

resulting in a federal adjustment;

(c) "Corporate partner" means a partner that is subject to tax under KRS 141.040;

(d) "Direct partner" means a partner that holds an interest directly in a partnership

or pass-through entity;

(e) "Exempt partner" means a partner that is exempt from taxation under KRS

141.040 (a) or (b);

(f) 1. "Federal adjustment" means a change to an item or amount determined

under the Internal Revenue Code that is used by a taxpayer to compute

income tax owed to the Commonwealth, whether that change results

from action by the:

a. Internal Revenue Service, including a partnership level audit; or

b. Filing of an amended federal return, federal refund claim, or an

administrative adjustment request by the taxpayer.

2. A federal adjustment is positive to the extent that it increases net income

or taxable net income and is negative to the extent that it decreases net

income or taxable net income;

(g) "Federal adjustments report" includes methods or forms required by the

department for use by a taxpayer to report final federal adjustments, including

an amended income tax return, information return, or a uniform multistate

report;

(h) "Federal partnership representative" means the person:

1. The partnership designates for the taxable year as the partnership’s

representative; or

2. The Internal Revenue Service has appointed to act as the federal

partnership representative, under Section 6223(a) of the Internal

Revenue Code;

(i) "Final determination date" means the following:

1. a. Except as provided in subparagraphs 2. and 3. of this paragraph, if

the federal adjustment arises from any action by the Internal

Revenue Service, the final determination date is the first day on

which no federal adjustments arising from that 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.

b. For agreements required to be signed by the Internal Revenue

Service and the taxpayer, the final determination date is the date

upon which the last party signed the agreement;

2. For federal adjustments arising from any action by the Internal Revenue

Service, if the taxpayer filed as a member of a consolidated return under

KRS 141.201 or a combined report under KRS 141.202, the final

determination date means the first day on which no related federal

adjustments arising from that action remain to be finally determined, as

described in subparagraph 1. of this paragraph, for the entire group; and

3. 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 under Section 6225(c) of the Internal Revenue Code,

the final determination date means the day on which the amended return,

refund claim, administrative adjustment request, or other similar report

was filed;

(j) "Final federal adjustment" means a federal adjustment after the final

determination date for that federal adjustment has passed;

(k) "Indirect partner" means a partner in a partnership or pass-through entity and

that partnership or pass-through entity holds an interest directly, or through

another indirect partner, in a partnership or pass-through entity;

(l) "Nonresident partner" means an individual, trust, or estate partner that is not a

resident partner;

(m) "Partner" means a person that holds an interest directly or indirectly in a

partnership or other pass-through entity;

(n) "Partnership" means an entity subject to the provisions of Subchapter K of

Chapter 1 of the Internal Revenue Code;

(o) "Partnership level audit" means an examination by the Internal Revenue

Service at the partnership level under Subchapter C of Chapter 63 of the

Internal Revenue Code, as enacted by Pub. L. No. 114-74, which results in a

federal adjustment;

(p) "Pass-through entity" means an entity, other than a partnership, that is not

subject to tax under KRS 141.040;

(q) 1. "Reallocation adjustment" means a federal adjustment resulting from a

partnership level audit or an administrative adjustment request that

changes the shares of one (1) or more items of partnership income, gain,

loss, expense, or credit allocated to direct partners.

2. A positive reallocation adjustment means the portion of a reallocation

adjustment that would increase federal income for one (1) or more direct

partners.

3. A negative reallocation adjustment means the portion of a reallocation

adjustment that would decrease federal income for one (1) or more

direct partners;

(r) "Resident partner" means an individual, trust, or estate partner that is a

resident for the relevant taxable year;

(s) "Reviewed year" means the taxable year of a partnership that is subject to a

partnership level audit from which federal adjustments arise;

(t) "Taxpayer" has the same meaning as in KRS 131.010 and includes:

1. a. A partnership subject to a partnership level audit; or

b. A partnership that has made an administrative adjustment request;

and

2. A tiered partner of the partnership described in subparagraph 1. of this

paragraph; and

(u) "Tiered partner" means any partner that is a partnership or pass-through entity.

(2) Except in the case of final federal adjustments that are required to be reported by a

partnership and its partners under subsection (3) of this section, and final federal

adjustments required to be reported for federal purposes under Section 6225(a)(2) of

the Internal Revenue Code, a taxpayer shall report and pay any income tax due with

respect to final federal adjustments arising from any action:

(a) By the Internal Revenue Service; or

(b) Reported by the taxpayer on a timely filed amended federal income tax return,

including a return or other similar report filed under Section 6225(c)(2) of the

Internal Revenue Code, or federal claim for refund;

by filing a federal adjustments report with the department for the reviewed year and,

if applicable, paying the additional tax owed by the taxpayer no later than one

hundred eighty (180) days after the final determination date.

(3) (a) Except for adjustments required to be reported for federal purposes under

Section 6225(a)(2) of the Internal Revenue Code, and the distributive share of

adjustments that have been reported as required under subsection (2) 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 under this subsection.

(b) 1. With respect to an action required or allowed to be taken by a

partnership under this subsection and a proceeding under KRS 131.110

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.

2. 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.

3. The department may establish reasonable qualifications and procedures

for designating a person, other than the federal partnership

representative, to be the state partnership representative.

(c) Final federal adjustments subject to the requirements of this subsection,

except for those subject to a properly made election under subsection (4) of

this section, shall be reported as follows:

1. No later than ninety (90) days after the final determination date, the

partnership shall:

a. File with the department a completed federal adjustments report,

including all information required by the department;

b. Notify each of its direct partners of their distributive share of the

final federal adjustments, including all information required by the

department; and

c. File an amended composite return for direct partners or an

amended withholding return for direct partners as required under

KRS 141.206 and pay the additional amount of tax that would

have been due had the final federal adjustments been reported

properly as required; and

2. No later than one hundred eighty (180) days after the final determination

date, each direct partner that is taxed under KRS 141.020 or 141.040

shall:

a. File a federal adjustments report reporting their distributive share

of the adjustments reported to them under subparagraph 1.b. of this

paragraph; and

b. Pay any additional amount of tax due as if final federal

adjustments had been properly reported, plus any penalty due

under KRS 131.180 and interest due under KRS 131.183 and

minus any credit for related amounts paid or withheld and remitted

on behalf of the direct partner under subparagraph 1.c. of this

paragraph.

(4) An audited partnership making an election under this subsection shall:

(a) No later than ninety (90) days after the final determination date, file a

completed federal adjustments report, including all information required by

the department, and notify the department that it is making the election under

this subsection; and

(b) No later than one hundred eighty (180) days after the final determination date,

pay an amount, determined as follows, in lieu of taxes owed by its direct and

indirect partners:

1. Exclude from final federal adjustments the distributive share of these

adjustments reported to a direct exempt partner not subject to tax under

KRS 141.040(1)(a) or (b);

2. For the total distributive shares of the remaining final federal

adjustments reported to direct corporate partners subject to tax under

KRS 141.040, apportion and allocate the adjustments under KRS

141.206 and multiply the resulting amount by the highest tax rate for the

taxable year under KRS 141.040;

3. For the total distributive shares of the remaining final federal

adjustments reported to nonresident direct partners subject to tax under

KRS 141.020, determine the amount of the adjustments under KRS

141.206 based on what would be subject to tax as Kentucky-sourced

income for a nonresident partner, and multiply the resulting amount by

the highest tax rate for the taxable year under KRS 141.020;

4. For the total distributive shares of the remaining final federal

adjustments reported to tiered partners, determine the amount of the

adjustments which is of a type that it would be subject to tax under KRS

141.206, less any amount that the audited partnership can determine to

the department's satisfaction that is not subject to tax, and multiply that

amount by the highest tax rate under KRS 141.020 or 141.040;

5. For the total distributive shares of the remaining final federal

adjustments reported to resident direct partners subject to tax under KRS

141.020, multiply that amount by the highest tax rate under KRS

141.020; and

6. Add the amounts determined in subparagraphs 2. to 5. of this paragraph,

and remit the amount along with penalty due under KRS 131.180 and

interest due under KRS 131.183.

(5) The election under subsection (4) of this section shall not apply to:

(a) The distributive share of final audit adjustments that under KRS 141.202 that

are included in the unitary business income of any direct or indirect corporate

partner, provided that the audited partnership can reasonably determine this;

(b) Any final federal adjustments resulting from an administrative adjustment

request; or

(c) Any audited partnership not otherwise subject to any reporting or payment

obligation to this state.

(6) (a) The direct and indirect partners of an audited partnership that are tiered

partners and all of the partners of those tiered partners that are subject to tax

under KRS 141.020 and 141.040 are subject to the reporting and payment

requirements of subsection (3) of this section and the tiered partners are

entitled to make the elections provided in subsection (4) of this section.

(b) The tiered partners or their partners shall make the required reports and

payments no later than ninety (90) days after the time for filing and furnishing

statements to tiered partners and the partners under Section 6226 of the

Internal Revenue Code and the regulations thereunder.

(c) The department may promulgate administrative regulations to establish

procedures and interim time periods for:

1. The reports and payments required by tiered partners and their partners;

2. Making the elections under this section;

3. The procedures related to the modified reporting and payment method

under subsection (7) of this section; or

4. A de minimis amount upon which a taxpayer shall not be required to

comply with this section.

(7) (a) Under procedures promulgated under KRS Chapter 13A by the department, an

audited partnership or a tiered partner may enter into an agreement with the

department to utilize an alternative reporting and payment method, including

applicable time requirements for any other provision of this section, if the

audited partnership or tiered partner demonstrates that the requested method

will reasonably provide for the reporting and payment of taxes, penalties, and

interest due under the provisions of this section.

(b) Application for approval of an alternative reporting and payment method shall

be made by the audited partnership or tiered partner within the times

established under subsection (4) or (6) of this section, as appropriate.

(8) (a) The election made under subsection (4) or (7) of this section is irrevocable,

unless the department, in its discretion, determines otherwise.

(b) If properly reported and paid by the audited partnership or tiered partner, the

amount determined under subsection (4) or (6) of this section 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.

(c) The direct partners or indirect partners may not take any deduction or credit

for this amount or claim a refund of the amount in this state.

(d) Nothing in this subsection shall preclude a direct resident partner from

claiming a credit against taxes paid to this state under KRS Chapter 141, any

amounts paid by the audited partnership or tiered partner on the resident

partner's behalf to another state or local tax jurisdiction under KRS 141.070.

(9) Nothing in this section prevents the department from assessing a direct partner or an

indirect partner for taxes they owe, using the best information available, in the event

that a partnership or tiered partner fails to timely make any report or payment

required by this section for any reason.

(10) The department shall assess additional tax, interest, and penalties resulting from any

final federal adjustments arising from an audit by the Internal Revenue Service

including a partnership level audit, reported by the taxpayer on an amended federal

income tax return, or as part of an administrative adjustment request by the

following dates:

(a) If a taxpayer files with the department a federal adjustments report or an

amended Kentucky tax return as required within the periods under this

section, the department may assess any amounts, including in-lieu-of amounts,

taxes, interest, and penalties arising from those federal adjustments if the

department issues a notice of the assessment to the taxpayer no later than the

expiration of the one (1) year period following the date of filing with the

department of the federal adjustments report; or

(b) If the taxpayer fails to file the federal adjustments report within the periods

specified in subsection (2) or (3) of this section, as appropriate, or the federal

adjustments report filed by the taxpayer omits final federal adjustments or

understates the correct amount of tax owed, the department may assess any

amounts, including in-lieu-of amounts, taxes, interest, and penalties arising

from the final federal adjustments, and absent fraud, if the department issues a

notice of the assessment to the taxpayer no later than the expiration of the six

(6) year period following the final determination date.

(11) (a) A taxpayer may make estimated payments to the department, following the

applicable process under KRS 141.207, of the tax expected to result from a

pending Internal Revenue Service audit, prior to the due date of the federal

adjustments report, without having to file the report with the department.

(b) The estimated tax payments shall be credited against any tax liability

ultimately found to be due and will limit the accrual of further statutory

interest on that amount.

(c) If the estimated tax payments exceed the final 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 filed a federal adjustments report

or claim for refund or credit of tax under this section no later than one (1) year

following the final determination date.

(12) (a) Except for final federal adjustments required to be reported for federal

purposes under Section 6225(a)(2) of this Internal Revenue Code, a taxpayer

may file a claim for refund or credit of tax arising from federal adjustments

made by the Internal Revenue Service on or before the later of:

1. The expiration of the last day for filing a claim for refund or credit under

KRS 134.580; or

2. One (1) year from the date a federal adjustments report under subsection

(2) or (3) of this section, as applicable, was due to the department.

(b) The federal adjustments report shall serve as the means for the taxpayer to

report additional tax due, report a claim for refund or credit of tax, and make

other adjustments, including any net operating loss, resulting from

adjustments to the taxpayer's federal taxable income.

(13) (a) Unless otherwise agreed in writing by the taxpayer and the department, any

adjustments by the department or by the taxpayer made after the expiration of

the time allowed under KRS 141.210 is limited to changes to the taxpayer's

tax liability arising from federal adjustments.

(b) The time periods provided for in this section may be extended, upon written

agreement between the taxpayer and the department, based on the complexity

of the federal adjustment or the number of direct partners or tiered partners.

(c) The time period shall be automatically extended, upon written notice to the

department, by sixty (60) days for an audited partnership or tiered partner

which has ten thousand (10,000) or more direct partners.

(d) 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.