A decision by Maryland’s highest court illustrates the complexities taxpayers face in reporting federal income tax audit changes for state income tax purposes. The Maryland Court of Appeals held that an individual must claim a state income tax refund resulting from a “final” federal audit change within one year of the Internal Revenue Service’s issuance of Form 4549A, Income Tax Examination Changes, rather than the date when the taxpayer could no longer appeal the Service’s determination. King v. Comptr. of Treas., 2012 WL 592788 (Md. Feb. 24, 2012), aff’g Md. App. (unreported), rev’g 2009 WL 6767497 (Calvert Cnty Cir. Ct. Nov. 12, 2009), rev’g Md. Tax Ct. (Aug. 28, 2008), aff’g Md. Comptr. Off. Hrg. and App. Section.
The taxpayer, who is the ex-wife of author Tom Clancy, owned a limited partnership interest in the Baltimore Orioles baseball team. A federal income tax audit of the partnership resulted in the IRS adjusting certain partnership items using Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations. The partnership adjustments flowed through to the taxpayer’s personal income tax return and permitted her to utilize additional losses, thereby reducing her federal taxable income. The IRS reported the impact of the partnership’s flow through adjustments to the taxpayer on Form 4549A, after which the taxpayer had a minimum of six months to challenge the IRS’ adjustments.
Maryland law provides that the statute of limitations on refund claims is reopened for a period of “one year from the date of: (i) a final adjustment report of the [IRS]; or (ii) a final decision of the highest court of the United States to which an appeal of a final determination of the [IRS] is taken.” Md. Code Ann. Tax-Gen. § 13-1104(c) (emphasis added). The taxpayer filed her Maryland refund claim more than one year after the IRS issued Form 4549A, but within one year of the time when her federal appeal rights expired. Following the state’s denial of her refund claim, she argued that the federal adjustments did not become “final” until her appeal rights expired, or alternatively, until the IRS actually applied the adjustments to her federal tax account.
The court rejected her arguments and instead held that under the plain language of the statute, the Form 4549A was the IRS’ “final adjustment report,” and the date when the taxpayer could no longer challenge the Form 4549A did not matter. The court reasoned that the legislature intended to address taxpayer appeals under the second provision of the statute, and since the taxpayer did not actually appeal the federal adjustments, she did not fall within that provision.
This case illustrates the challenges and uncertainties taxpayers face when deciding how and when to report federal audit changes to the states. Particularly where the federal changes result in a refund, it is critically important to comply with state filing deadlines, some of which may be as short as 30 days instead of Maryland’s one-year period. Even states with the same statutory time period and similar statutory language may interpret the starting point for the time period differently, such that a taxpayer’s refund claim could expire at different times.