MTC Income Tax Audit Manual DRAFT vIII

Gsm

Informations

• Publié par: Theyr
• Nombre de lectures: 17
• Langue: English

Extrait

Income & Franchise Tax Audit Manual

Rev. June 2010












Multistate Tax Commission
444 North Capitol Street, N.W., Suite 425
Washington, D.C. 20001

Telephone: [phone]
Website: www.mtc.gov













[This page intentionally left blank]
MTC Income & Franchise Tax Manual June 2010 PUBLIC DRAFT Page 2 of 100 Multistate Tax Commission
Income & Franchise Tax Audit Manual


Table of Contents


Chapter Title Page

1..............Introduction ..................................................................................4
2..............Terms and Definitions..................................................................5
3..............Pre-Audit Procedures ...................................................................8
4..............Statutes of Limitation & Waivers ..............................................10
5..............Working with Taxpayers ............................................................12
6..............Nexus .........................................................................................16
7..............Unitary Investigation .................................................................24
8..............Computation of Income .............................................................43
9..............State Adjustments ......................................................................52
10............Business & Non-Business Income .............................................60
11............Apportionment ...........................................................................71
12............Allocated Income & Deductions ................................................86
13............Net Operating Losses .................................................................87
14............Computation of Proposed Tax Changes ....................................90
15............Narrative ....................................................................................91
16............Assembly of Audit Report .........................................................96
17............Review & Transmittal to Participating States ............................98


MTC Income & Franchise Tax Manual June 2010 PUBLIC DRAFT Page 3 of 100 1. Introduction


1.01 The Joint Audit Program of the Multistate Tax Commission (“MTC” or
“Commission”) was initiated in the early 1970s under the auspices of Article VIII of the
Multistate Tax Compact.

1.02 This Income & Franchise Tax Audit Manual (“IFTAM” or “manual”) sets
forth the procedures that Commission auditors follow in performing a joint audit on
behalf of the Joint Audit Program member states who have elected to participate in a
specific audit.

1.03 The information provided in the MTC IFTAM does not reflect changes in
law, regulations, notices, decisions, or administrative procedures that may have been
adopted by Joint Audit Program member states since the manual was last updated.

1.04 The IFTAM is provided for the guidance of the Commission’s joint audit
staff and is not authoritative, and may neither be cited to support an audit position nor
relied upon by a taxpayer. The laws of the states for which a joint audit is being
conducted govern audit positions with respect each state. The manual merely reflects the
Commission’s internal joint audit procedures and guidelines.

1.05 Any suggestions or corrections are welcomed and should be
communicated to Commission’s Joint Audit Program director.


MTC Income & Franchise Tax Manual June 2010 PUBLIC DRAFT Page 4 of 100 2. Definitions


2.01 This section lists terms and definitions use extensively in multistate audits;
in many cases, the terms are statutorily defined by the states, and there may be
differences among the states in how a particular term is defined. Auditors will need to
develop a general, working knowledge of these terms and definitions.

2.02 Allocation. A method of sourcing taxable income to a state or other
political subdivision. Nonbusiness income is allocated to a state if it can be specifically
sourced to that state. For state tax purposes, nonbusiness income is usually allocated to
the state of the corporation's commercial domicile, or to where the property giving rise to
the income is located.

2.03 Apportionment. A method of attributing income to the states in which a
multistate or multinational corporation is doing business. A portion of the corporation's
income is divided (based on an apportionment formula) among the taxing states.

2.04 Apportionment Formula. The manner of computing the portion of a
taxpayer’s income subject to tax in a particular state. The standard Uniform Distribution
of Income for Tax Purposes Act (UDITPA) formula is the average of three factors
multiplied by the taxpayer's business income. The three factors are: property, payroll
and sales. Variations of this formula are also used in various states.

2.05 Business Activity. Business activity refers to transactions and activity
occurring in the regular course of a particular trade or business of a taxpayer.

2.06 Business Income. Generally, this is income which arises from the regular
course of a taxpayer's trade or business. It includes income from tangible and intangible
property, if such property constitutes an integral part of the taxpayer's regular trade or
business.

2.07 Combined Reporting. A method of measuring the tax liability of a
corporation. An apportionment formula is applied to the combined unitary income of the
corporation and its affiliates.

2.08 Combined Report. A combined report is a report in which the business
income and apportionment factors of a unitary group of corporations are combined for
purposes of determining each taxpayer’s share of the unitary business income.

2.09 Commercial Domicile. The principal place from which the trade or
business of the taxpayer is directed or managed.

2.10 Compensation. Wages, salaries, commissions and any other form of
remuneration paid to employees for personal services.
MTC Income & Franchise Tax Manual June 2010 PUBLIC DRAFT Page 5 of 100 .
2.11 Consolidated Returns. Under federal law, a filing method which allows
certain related corporations (over 80 percent ownership) the convenience of filing a
single tax return and paying one tax amount

2.12 Fiscalization. The process of placing the income and formula factors of
unitary corporations with differing accounting periods onto a common taxable year-end
in order to compute a combined report.

2.13 Foreign Corporation. For state purposes, a corporation which is
organized under the laws of another state. For federal purposes, a corporation organized
in a foreign country.

2.14 Intrastate Apportionment. The process of determining the unitary income
apportioned and allocated to each taxpayer in a combined group. This process is
necessary in order to determine the individual tax liability for each taxpayer, as well as to
properly compute items such as NOLs, AMT, and tax credits.

2.15 Nexus. A connection or link between a corporation and a state, which is
sufficient to empower the state to tax the corporation's income.

2.16 Non-business income. Generally, nonbusiness income is all income which
is not business income (i.e., the income doesn't arise from the taxpayer's normal business
activities).

2.17 PL 86-272. Public Law 86-272 (15 USCA 381) was enacted in 1959 to
limit the states' ability to tax interstate commerce. It provides that a state cannot impose a
net income tax on a business if the business activities within the state are limited to the
solicitation of sales of tangible personal property.

2.18 Sales. All gross receipts of the taxpayer not allocated as nonbusiness
income.

2.19 State. Any State of the United States, the District of Columbia, the
Commonwealth of Puerto Rico, any Territory or Possession of the United States, and any
foreign country or political subdivision thereof.

2.20 Taxable in another state. For purposes of apportionment and allocation of
income, the taxpayer is taxable in another state if either of two conditions exist: (1) a
taxpayer is taxable in another state if within that state it is subject to a net income tax, a
franchise tax measured by net income, a franchise tax for the privilege of doing business,
or a corporate stock tax; (2) a taxpayer is also taxable in another state if that state has
jurisdiction to subject the taxpayer to a net income tax regardless of whether the state
actually imposes such a tax upon the taxpayer.

MTC Income & Franchise Tax Manual June 2010 PUBLIC DRAFT Page 6 of 100 2.21 Taxpayer. A taxpayer is any person or bank subject to the tax imposed
under each state’s tax laws.

2.22 Throwback sales. When sales of tangible