Tie-In to Federal Partnership Tax Audit Rules

The second change made by the act is that it adapts the New Jersey Gross Income Tax laws and a number of procedural provisions of New Jersey tax law to the federal centralized partnership audit regime enacted as part of the federal 2015 Bipartisan Budget Act. As a result of these changes and clarifications:

• Partnerships required to file New Jersey information tax returns must report any federal partnership audit adjustments made by the IRS by filing a copy of the federal adjustments report with the NJ Division of Taxation within 90 days after the federal final determination date.
• A partnership audited at the federal level with audit adjustments can elect to pay the New Jersey taxes triggered by such adjustments in lieu of taxes otherwise owed by its direct and indirect partners, along with interest and penalties, within 180 days after the final determination date. Otherwise, the partners of the reviewed year must make payment of New Jersey Gross Income Tax, interest, and penalties triggered by the federal adjustments.
• The Division possesses the legal authority to assess the New Jersey tax resulting from any federal adjustments against the partnership or its partners.
• The state partnership representative shall have the sole authority to act on behalf of the partnership, and the partnership’s direct and indirect partners shall be bound by any actions taken by the partnership with respect to the reviewed year. The partnership’s federal partnership representative is by default the state partnership representative unless the partnership designates some other person in writing.

These New Jersey partnership audit and adjustment provisions take effect immediately and apply to any adjustments to federal table income on or after January 1, 2020.

Conclusions

The marrying of New Jersey S corporation elections with federal elections removes a New Jersey trap for the unwary that has created problems for decades. The ability to opt out and be treated as a C corporation adds some flexibility, especially useful for corporations with a number of New Jersey nonresident shareholders.



The amendments tying New Jersey’s partnership tax law to the federal centralized partnership audit rules clarify and conform New Jersey’s law to the federal law. The specification of who is the state partnership representative should reduce potential disputes and implicitly makes it easier to draft the relevant tax audit provisions of partnership agreements and LLC operating agreements.