Revenue Administrative Bulletin 1988-20

Approved: May 27, 1988

INDIVIDUAL INCOME TAX - STATUTE OF LIMITATIONS WITH RESPECT TO ISSUING AN ASSESSMENT OR A REFUND BASED ON A FEDERAL AUDIT

RAB-88-20. This Bulletin describes the statute of limitations with respect to assessing a tax liability and issuing a refund based on an audit, conference, hearing or the litigation of a liability for Federal income tax which affects the Michigan taxable income of an individual required to file a return under the Michigan Income Tax Act.

Notification Requirement

A taxpayer shall file an amended return within 120 days after a final determination is made of his or her Federal income tax return showing any alteration, modification, or recomputation from an audit by the Internal Revenue Service (IRS) if these changes affect his or her Michigan taxable income. The final determination occurs on the date the determination of changes or corrections is made. [MCL 206.325(2)]

If the Federal tax liability from these modifications does not increase by more than $500.00, the taxpayer is not required to file an amended Michigan income tax return. However, the Department is not precluded from assessing the increase in Michigan income tax that results from the Federal audit.

Assessing a Tax Liability

General Rule

The Department may not assess a deficiency in tax, penalty or interest later than: (1) four years after the date set for the filing of the required return, or (2) four years after the date the return is filed. [MCL 205.27a(2)]

This statute of limitations does not begin to run for a taxable year in which an original return is required under the Michigan Income Tax Act and is not filed. [MCL 205.27a(2)]

The running of the statute of limitations is suspended during the period the taxpayer and the Commissioner of Revenue have consented to in writing that the period be extended. [MCL 205.27a(3)(b)] Further, the statute will not run pending a final determination of tax, including audit, conference, hearing and litigation of liability for Federal income tax or a tax administered by the Department. [MCL 205.27a(3)(a)]

Assessing a Tax Liability Based on Federal Audit Changes

The Department may not assess a deficiency of Michigan income tax, penalty or interest later than one year after the Michigan income tax return has been filed in response to Federal audit changes if the statute of limitations, as defined under the general rule, has expired or is expected to expire within that one-year period.

The running of the statute of limitations shall be suspended only as to those items which were the subject of audit, conference, hearing or litigation for Federal income tax or a tax administered by the Department. [MCL 205.27a(4)]

Failure to Notify

If the Department discovers that a taxpayer has failed to notify the Department within 120 days of the final determination issued by IRS of any adjustment made to his or her Federal income tax liability affecting Michigan taxable income, the Department is required to assess the tax deficiency within 2 years after the discovery. [MCL 205.27a(2)] However, where a taxpayer is not required to file an amended return, the Department must assess the tax within one year from the date of the final determination if the ordinary statute of limitations is expired.

Issuing a Refund

General Rule

A taxpayer may claim a refund of an amount paid to the Department within 4 years from the date set for the filing of the original return. [MCL 205.27a(2)]

Refund Based on Federal Audit

A taxpayer must file an amended return to claim a refund of an amount paid when the decrease in Michigan taxable income resulted from adjustments made to his or her Federal income tax return from a Federal adjustment. [MCL 206.325(2)]

If the statue of limitations as defined under the general rule has expired for the taxable year, a taxpayer must file a claim for a refund within one year from the final determination of litigation of or hearing on the taxpayer's Federal income tax return or a return required by the Michigan Income Tax Act. [MCL 206.411(1)] The running of the statute of limitations is suspended only for those items which are the subject of an audit, conference, hearing or litigation for either the Federal income tax or a tax administered by the Department. [MCL 205.27a(4)]

Example 1: Taxpayer's C's 1983 federal return was audited which decreased Michigan taxable income. The Federal audit determination was issued on June 5, 1987. The taxpayer must file an amended 1983 Michigan income tax return by June 4, 1988 to receive a refund based on the Federal audit changes.

Example 2: On January 15, 1987, a determination of Taxpayer D's 1985 Federal income tax return was issued showing overstated business income. Taxpayer D must file a claim for a refund of tax overpaid no later than 4 years from the due date of the original return. The 1 year provision does not apply here since 4 years from the original due date is later than 1 year from the final determination made by the IRS.