2020 Iowa Acts, House File 2641, Division V, modified the procedures and requirements for reporting federal income tax changes to the Iowa Department of Revenue. This guidance is intended to provide a general overview of these procedures and requirements for Iowa taxpayers who are individuals (IA 1040), estates or trusts (IA 1041), C corporations (IA 1120), financial institutions (IA 1120F), S corporations (IA 1120S), partnerships (IA 1065), and composite return filers (IA 1040C or IA PTE-C), for federal income tax changes made after July 1, 2020. The Department intends to adopt or update administrative rules as necessary to implement these law changes and this guidance.
Federal Amended Returns or Federal Audit Adjustments
Note: This section does not cover federal income tax changes governed by the Bipartisan Budget Act of 2015 (BBA), also referred to as the centralized partnership audit regime. If you are a partnership or partner that is subject to a federal centralized partnership audit change or a federal administrative adjustment request (AAR) change, see the “Federal Centralized Partnership Audit Regime” section below.
When you or your business file an amended federal income tax return that affects the computation of reportable Iowa income or Iowa tax liability on your previously-filed Iowa tax return, you are required to file an amended Iowa tax return for the same tax year to report those changes, and include a copy of your federal amended tax return. You are also required to include an IA 102 Amended Return Schedule with your amended Iowa tax return, unless you are an individual amending on an IA 1040X.
Refunds. If your federal income tax changes result in a refund of Iowa tax, the refund may be requested on an amended Iowa tax return within three years of the due date of the original Iowa tax return, including extensions, or within one year after the payment of the Iowa tax, whichever is later. Filing a federal amended income tax return does not extend the time limitation on requesting an Iowa tax refund.
Additional tax due. In addition to all other examination and tax assessment periods, the Department has one year to assess additional Iowa tax, penalty, and interest, from the date you properly file an amended Iowa tax return reporting the federal tax changes. This additional one-year tax assessment period does not begin until you properly file an amended Iowa tax return reporting the federal tax changes, thus the tax assessment period is unlimited if you do not properly file an amended Iowa tax return.
Underpayment penalties. You will be subject to Iowa underpayment penalties if the Iowa tax you paid by the due date of your original Iowa tax return is less than 90% of the total Iowa tax liability on your amended Iowa tax return. However, you may, under certain circumstances, avoid underpayment penalties if you file your amended Iowa tax return and pay the additional Iowa tax prior to any contact by the Department. Other Iowa tax penalties may also apply depending on your situation.
When you or your business is subject to an Internal Revenue Service (IRS) audit or examination that adjusts items or amounts on your federal income tax return in a way that affects the computation of reportable Iowa income or Iowa tax liability on your previously-filed Iowa tax return, you are required to report those changes to the Department on an amended Iowa tax return for the reviewed year and include all of the following:
- A copy of the IRS audit report or other federal document that shows the final determination and explains the final federal adjustments.
- An IA 102 Amended Return Schedule, unless you are an individual amending on an IA 1040X.
- A copy of your federal amended tax return, if one was filed.
Reporting deadline. The amended Iowa tax return must be filed, and any resulting Iowa tax must be paid, within 180 days of the final determination date of the IRS audit. The “final determination date” is the day that the right to appeal the IRS’s audit adjustments expires, whether by agreement, waiver, or final ruling.
Refunds. If the IRS audit changes result in a refund of Iowa tax, the refund may be requested on an amended Iowa tax return within one year from the final determination date of the IRS audit, even if all other statute of limitations periods for requesting a refund have expired under Iowa law.
Additional tax due. In addition to all other examination and tax assessment periods, the Department has one year to assess additional Iowa tax, penalty, and interest, from the date you properly file an amended Iowa tax return reporting your final IRS audit adjustments. This additional one-year tax assessment period does not begin until you properly file an amended Iowa tax return reporting the IRS audit adjustments, thus the tax assessment period is unlimited if you do not properly file an amended Iowa tax return.
Underpayment penalties. If you fail to timely and properly report the federal audit changes and pay the additional Iowa tax within 180 days of the final determination date of the IRS audit, you will be subject to Iowa underpayment penalties if the Iowa tax you paid by the due date of your original Iowa tax return is less than 90% of your total Iowa tax liability following the IRS audit. However, you may, under certain circumstances, avoid underpayment penalties if you file your amended Iowa tax return and pay the additional Iowa tax prior to any contact by the Department. Other Iowa tax penalties may also apply depending on your situation.
Federal Centralized Partnership Audit Regime Changes
The Bipartisan Budget Act (BBA) of 2015 created a centralized partnership audit regime that changed how most federal partnership returns are audited and amended, and how additional federal taxes are collected. For tax years 2018 and forward, the IRS makes audit adjustments and generally collects additional federal taxes at the partnership level for partnerships subject to the federal centralized partnership audit regime. View additional information about the federal BBA Centralized Partnership Audit Regime. If a partnership under this regime (called a “BBA partnership”) is audited by the IRS or files a federal Administrative Adjustment Request (AAR), the partnership and its direct and indirect partners must follow certain procedures and timelines for reporting the adjustments to Iowa and paying the resulting Iowa tax or requesting Iowa refunds. Taxpayers who have questions about this process and its effect on Iowa income tax reporting are encouraged to submit a policy guidance request to the Department.
If a BBA partnership needs to modify income or other partnership items after filing its federal 1065 return, an amended federal return and amended schedules K-1 are generally not allowed. Instead, the partnership files a federal Administrative Adjustment Request (AAR). Federal AAR changes that increase federal tax (called an “imputed underpayment”) are either paid by the partnership or are reported to the partners (called a “push-out election”) and paid by the partners on their current-year federal tax return. Federal changes that do not result in an imputed underpayment (i.e. those that reduce federal tax) are reported to the partners and may entitle the partners to a nonrefundable credit against federal tax on their current-year federal tax return.
When a BBA partnership files a federal AAR that affects the computation of reportable Iowa income or Iowa tax liability of the filing partnership or its direct or indirect partners on a previously-filed Iowa tax return, the partnership and its direct and indirect partners are required to report those changes to the Department on amended Iowa tax returns, and if applicable, to partners on amended Iowa Schedules K-1, even though the partners may not be required to file a federal amended return or pay additional federal tax. An amended Iowa tax return must be filed for each tax year affected by the federal AAR. In the case of the partnership that filed the AAR or a direct or indirect partner that is itself a pass-through entity (called a “tiered partner”), amended composite returns (IA 1040C or IA PTE-C) and amended partner withholding reports are also required if those Iowa returns were previously filed. The amended Iowa tax returns should include the following additional information:
- An IA 102 Amended Return Schedule, unless you are a partner that is an individual amending on an IA 1040X.
- If you are the partnership that filed the AAR, include a copy of that federal AAR and any other federal forms or documents describing the federal adjustments such as federal Form 8985.
- If you are a direct or indirect partner, include a copy of your amended Iowa Schedule K-1, if you received one, and any federal form or document describing your share of the federal adjustments such as federal Forms 8985 (if a tiered partner), 8986, and 8978.
Reporting deadline. The required amended Iowa tax return(s) must be filed, and any resulting Iowa tax, penalty, and interest must be paid, by the following date:
- Partnership that filed the AAR: Within 90 days of the date the AAR was filed.
- Direct partners: Within 180 days of the date the AAR was filed.
- Indirect partners: Within 90 days of the extended due date of the federal tax return of the partnership that filed the AAR for the tax year during which the AAR was filed by the partnership.
Refunds. If the filing of a federal AAR results in a refund of Iowa tax to you (as the partnership that filed the AAR or a direct or indirect partner), the refund may be requested on an amended Iowa tax return within three years of the due date of your original Iowa tax return, including extensions, or within one year after payment of the Iowa tax, whichever is later. Filing an AAR does not extend the time limitation on requesting an Iowa tax refund.
Additional tax due. In addition to all other examination and tax assessment periods, the Department has one year to assess additional Iowa tax, penalty, and interest from the date you (as the partnership that filed the AAR or a direct or indirect partner) properly file your amended Iowa tax return reporting the federal tax changes. This additional one-year tax assessment period does not begin until you properly file your amended Iowa tax return reporting the federal tax changes, thus the tax assessment period is unlimited if you do not properly file an amended Iowa tax return.
Underpayment penalties. You (as the partnership that filed the AAR or a direct or indirect partner) will be subject to Iowa underpayment penalties if the Iowa tax you paid by the due date of your original Iowa tax return is less than 90% of the total Iowa tax liability on your amended Iowa tax return. However, you may, under certain circumstances, avoid underpayment penalties if you file your amended Iowa tax return and pay the additional Iowa tax prior to any contact by the Department. Other Iowa tax penalties may also apply depending on your situation.
When a BBA partnership is subject to an IRS audit or examination that adjusts items or amounts on the partnership return for a tax year (called the “reviewed year”), a process begins at the federal level to resolve those adjustments and pay or refund the related federal tax.
Before the audited partnership receives its federal Notice of Final Partnership Adjustments (FPA) from the IRS, there is a statutory modification period during which the audited partnership’s adjustments may be reduced if one or more partners file amended federal returns for the reviewed year and any affected intervening years and pay their share of the federal tax increase, or, in lieu of amended federal returns by partners, the audited partnership uses an alternative process (called the “pull-in process”) whereby it separately computes, reports, and pays the federal tax due by one or more partners for the reviewed years and any intervening years. When the changes reported with these amended federal tax returns or the alternative pull-in process affect the computation of reportable Iowa income or Iowa tax liability on a partner’s previously-filed Iowa tax return, the partner is required to file an amended Iowa tax return to report those changes to the Department pursuant to the guidance described above under “Federal Amended Income Tax Returns.” An amended Iowa tax return is required even if the partner’s federal tax liability was reported and paid under the alternative pull-in process and the partner did not actually file an amended federal tax return. In addition to the required Iowa tax return attachments described above under “Federal Amended Income Tax Returns”, a partner utilizing the alternative pull-in process should include with their amended Iowa tax return any federal forms or documents supporting and describing the partner’s alternative reporting procedure, including but not limited to federal Forms 8980 and 8982. The remaining guidance below only relates to the audited partnership and to those direct and indirect partners who do not utilize the federal amended return or pull-in process during the modification period.
When the modification period is complete and the audited partnership receives its FPA from the IRS, the IRS audit changes are reported and paid by the audited partnership and its partners according to the federal centralized partnership audit regime rules. IRS audit changes that increase federal tax (called an “imputed underpayment”) are either paid by the audited partnership or are reported to the partners (called a “push-out election”) and paid by the partners on their current-year federal tax return. IRS audit changes that do not result in an imputed underpayment (i.e. those that reduce federal tax) are either reported to the partners, which may entitle the partners to a nonrefundable credit against federal tax on their current-year federal tax return, or are claimed as a deduction on the current-year federal tax return of the audited partnership or a partner that is itself a pass-through entity (called a “tiered partner”) and are allocated to the partners on the federal Schedules K-1 in the same manner as other partnership income and loss for the current tax year. Important note: Any IRS audit change that is not an imputed underpayment and that is claimed as a deduction on the audited partnership’s or tiered partner’s current-year federal tax return and allocated to partners on the federal Schedules K-1 must be added back on the Iowa tax return for the same tax year by the audited partnership or tiered partner and any direct or indirect partner. This Iowa add-back is required under Iowa Code sections 422.7(38) and 422.35(10). To the extent these negative IRS audit adjustments result in a refund of Iowa tax to any direct or indirect partner for the reviewed year or any intervening year, the negative adjustments must instead be reported, and the refund requested, on amended Iowa tax returns by the partnership and direct and indirect partners as described below.
When federal centralized partnership audit changes affect the computation of reportable Iowa income or Iowa tax liability of the audited partnership or its direct or indirect partners on a previously-filed Iowa tax return, the audited partnership and its direct and indirect partners are required to report those changes to the Department on amended Iowa tax returns, and, if applicable to partners, on amended Iowa Schedules K-1, even though the partners may not be required to file a federal amended return or pay additional federal tax. An amended Iowa tax return must be filed for each tax year affected by the IRS audit changes. In the case of the audited partnership or a tiered partner, amended composite returns (IA 1040C or IA PTE-C) and amended partner withholding reports are also required if those Iowa returns were previously filed. The amended Iowa tax returns should include the following additional information:
- An IA 102 Amended Return Schedule, unless you are a partner that is an individual amending on an IA 1040X.
- If you are the audited partnership, include a copy of the federal document that shows the final determination and explains the final federal adjustments.
- If you are a direct or indirect partner, include a copy of your amended Iowa Schedule K-1, if you received one, and any federal form or document describing your share of the federal adjustments such as federal Forms 8985 (if a tiered partner), 8986, and 8978.
Reporting deadline. The required amended Iowa tax return(s) must be filed, and any resulting Iowa tax, penalty, and interest must be paid within a certain period of time after the final determination date of the federal partnership audit adjustments. The “final determination date” is the date that the right to appeal the IRS’s audit adjustments expires, whether by agreement, waiver, or final ruling. The Iowa tax returns and payments are due by the following date:
- Audited partnership: Within 90 days of the final determination date of the federal partnership audit adjustments.
- Direct partners: Within 180 days of the final determination date of the federal partnership audit adjustments.
- Indirect partners: Within 90 days of the extended due date of the federal tax return of the audited partnership for the tax year during which the federal partnership audit adjustments become final.
Refunds. If the final federal partnership audit adjustments result in a refund of Iowa tax to you (as the audited partnership or a direct or indirect partner), the refund may be requested on an amended Iowa tax return within one year of your reporting deadline, even if all other statute of limitations periods for requesting a refund have expired under Iowa law.
Additional tax due. In addition to all other examination and tax assessment periods, the Department has one year to assess additional Iowa tax, penalty, and interest, from the date you (as the audited partnership or a direct or indirect partner) properly file your amended Iowa tax return reporting the federal audit changes. This additional one-year tax assessment period does not begin until you properly file your amended Iowa tax return reporting the federal tax changes, thus the tax assessment period is unlimited with respect to any tax year for which you do not properly file an amended Iowa tax return.
Underpayment penalties. If you fail to timely and properly report your federal audit changes and pay the additional Iowa tax and interest by your reporting deadline, you will be subject to Iowa underpayment penalties if the Iowa tax you paid by the due date of your original Iowa tax return is less than 90% of your total Iowa tax liability following the federal audit. However, you may, under certain circumstances, avoid underpayment penalties if you file your amended Iowa tax return and pay the additional Iowa tax prior to any contact by the Department. Other Iowa tax penalties may also apply depending on your situation.
Election to pay. An audited partnership or a tiered partner (i.e. a pass-through entity) may elect to pay on its owners’ behalf the Iowa tax, penalty, and interest resulting from a federal centralized partnership audit. The election and payment calculation are made on the IA 103 Pass-Through Audit Election to Pay Schedule. Please consult the IA 103 for additional information about the election and payment calculation.
When an election to pay on your owners’ behalf is made, the pass-through entity is still required to file amended Iowa tax returns as described above, but the entity should not issue amended Iowa Schedules K-1 to its owners. Instead, the pass-through entity should notify the owner of all of the following in a separate letter or schedule:
- Identify the owner’s distributive share of the audit adjustments.
- Notify the owner that you have elected to pay the resulting Iowa tax, penalty, and interest on their behalf.
- Notify the owner that they shall not claim any deduction, credit, or refund, for the amount paid by the pass-through entity, and they may not include the amount paid on the owner’s Iowa return in any manner.
Note, however, that negative reallocation adjustments cannot be included in the election to pay calculation. A negative reallocation adjustment is a final federal partnership audit adjustment that decreases the share of partnership items allocated to a direct partner. Any Iowa tax refund related to a negative reallocation adjustment must be requested on an amended Iowa tax return of the appropriate owner within the applicable time period described above. A negative reallocation adjustment may be reported by the pass-through entity on an amended Schedule K-1 to the appropriate owner even if an election to pay is made by the pass-through entity.
The election to pay is irrevocable, nonrefundable, and must be made by the pass-through entity’s reporting deadline described above for filing amended Iowa tax returns. A failure by the pass-through entity to pay the required amount due following an election may result in a tax assessment to the pass-through entity or its owners.