New York plans to align with the federal centralized partnership audit regime as part of Governor Kathy Hochul’s fiscal year 2026 budget. The 2026 budget proposal would amend various tax law provisions and introduce a new section, § 659-a, detailing how partnerships must report federal changes and pay any resulting tax on behalf of their partners. The proposal aims to clarify New York state reporting requirements since the IRS started its partnership audit initiative in 2018. New York’s proposal would be retroactive to adjustments after January 1, 2018.
The IRS’s centralized partnership audit regime (CPAR), established by the Bipartisan Budget Act of 2015, streamlines the audit process for partnerships. Under CPAR, the IRS assesses and collects taxes at the partnership level rather than at the individual partner level, simplifying audits for large, complex partnerships. Additionally, partnerships generally cannot file traditional amended returns under CPAR and must use an Administrative Adjustment Request (AAR) to report changes to previously filed returns.
Only about half of the states have adopted rules similar to CPAR, which has caused significant confusion for partnerships, partners and limiting nonconforming states, like New York, from collecting the appropriate amount of tax resulting from such adjustments.
Governor Hochul’s budget aims to eliminate uncertainty about reporting CPAR-related federal tax adjustments. Under the proposal, any CPAR-related adjustments affecting a partnership with a New York resident partner or income derived from New York sources, must be reported to New York within 90 days of the federal adjustment. Notably, New York’s proposal would not recognize federal push-out elections or have a similar mechanism. For example, if a federal adjustment increased New York taxable income, the partnership would be required to compute and to pay the tax due. However, if the adjustment decreased New York taxable income, then the partners, not the partnership, may request any resulting overpayment.
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