The Tax Cuts and Jobs Act is already expected to produce a flood of amended returns at the state level, but now taxpayers might race to file refund claims in light of state economic pressures.
That was one scenario in the age of the COVID-19 pandemic described August 13 by panelists during the Georgetown University Law Center's 2020 Advanced State and Local Tax Institute.
Paul A. Broman of BP America Inc. said that during past economic downturns, state revenue departments have issued credits for refunds. He wondered whether states would do so again. Valerie Dickerson of Deloitte Tax LLP said issuing credits for refunds is probably already an option under consideration in some states.
Broman said he believes that the TCJA, combined with the changes to net operating losses contained in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, are going to result in a very large number of amended state returns.
“The states are already suffering with revenue impacts, and this is kind of salt in the wound,” he said.
Broman said he expects states to react differently to taxpayers filing an amended return to report federal changes versus taxpayers reporting a change in the federal starting-point calculation on their state corporate income tax return. He said that in his experience, states will sometimes initially deny a taxpayer’s attempt to file an amended state return to report a federal change without a revenue agent’s report. States ask for evidence that the IRS has either accepted or processed the change, he said, adding that the way he has dealt with this is to get a federal transcript and provide it to the state auditor.
“I think it’s going to be a very common issue,” he said.
Speaking on his own behalf, Michael T. Fatale, deputy general counsel for the Massachusetts Department of Revenue, said there are more state revenue concerns now than when the TCJA was enacted. It’s possible that amended returns associated with either the TCJA or the CARES Act could result not only in audits but also in potential state legislative action to address revenue shortfalls.
Because of safety precautions taken during the pandemic, state lawmakers have not been in session to consider in real time the implications of the CARES Act’s retroactive changes, Fatale said. He added that in some instances, state lawmakers never considered the revenue consequences of conforming to or decoupling from certain TCJA provisions.
There are legal and practical restrictions state legislatures might face should they attempt to retroactively limit taxpayer benefits provided by the CARES Act, Fatale also said. The legal limitation is a largely constitutional due process issue that Fatale suggested could be overcome if the states acted relatively quickly. “As a practical matter there are no taxpayer-settled expectations that are likely to be impacted,” and certainly not at the state level, Fatale said. The CARES Act is new, it’s complicated, the state revenue implications are not clear, and the federal law itself is retroactive, he said.
However, Fatale said he believes there’s a practical limitation. Courts tend to give deference to state legislatures on retroactive tax legislation on the theory that the political process is the best venue for determining what is fair legislation.
“But that very political process could prove problematic to any state that wants to act here,” Fatale said.
When refund requests come in, Fatale said he believes it is going to be hard for states to turn around and say maybe they shouldn’t be granting refunds when government needs funds for other services.
Broman said that given all the different filing deadlines and statutes of limitations considerations, it’s important that taxpayers don’t miss out on refund claims. Also, Broman said that he leans toward netting across multiple years when a taxpayer is reporting a liability in some of those years and is claiming a refund in others. He said he has seen states otherwise process the returns for years in which the taxpayer has included a payment of tax and interest but deny the returns for years with refund claims.
Broman also said to pay attention to the availability of electronic signatures, given COVID-19 safety precautions combined with the likely huge number of amended state returns and the short timelines taxpayers will have to file them. Broman said that for returns with a payment, consider signing electronically but including a scan of the original signature. But when filing an amended return asking for a refund, it’s probably best to get an original signature, he aded.