When the IRS audits a corporation and changes its income, must the corporation file an amended Texas franchise-tax report, and by when?

Plain-English summary

A taxpayer asked how to report federal audit changes to Texas. The Comptroller explained the amended-report duty and the related limitations rules for the pre-2008 franchise tax.

• You must amend. Under Tax Code Sec. 171.212(a)(1), a corporation must file an amended franchise-tax report when its net taxable earned surplus is changed by an IRS audit or other adjustment.
• 120-day deadline. Sec. 171.212(b) requires the amended report within 120 days after the Revenue Agent's Report (RAR) or other adjustment is final.
• Limitations stay open. Under Sec. 111.206(f)(2), the limitations period stays open one year from when the Comptroller receives the IRS audit report or discovers the results, whichever is shorter. Reports already outside limitations on September 1, 1997 are not covered. Periods the Comptroller previously audited remain subject to Sec. 171.212.
• How to file. File as soon as the RAR is final, put "Amended Report" at the top, attach a cover letter with the enclosures needed to support the adjustment, and note that although penalty and interest apply, you may request a waiver.

Currency note: This letter describes the pre-2008 franchise tax (taxable capital and earned surplus), replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928. The margin tax uses a different base and its change-reporting provisions differ; confirm current requirements.

What this means for you

Corporations with IRS adjustments (pre-2008 reports)

A federal audit change flowed through to Texas: you had to amend within 120 days of the final RAR. That change could also keep the state's limitations window open. Filing promptly with a clear cover letter, and requesting a penalty/interest waiver, was the recommended path.

Tax professionals

The letter ties three provisions together - the amended-report duty (Sec. 171.212(a)(1)), the 120-day clock from a final RAR (Sec. 171.212(b)), and the one-year limitations extension keyed to the Comptroller's receipt or discovery (Sec. 111.206(f)(2)), with the September 1, 1997 cutoff. Confirm the current-law analogues before relying on the specific citations.

Common questions

Q: Do I have to tell Texas about an IRS audit change?
A: Yes, if it changes your net taxable earned surplus - you must file an amended franchise-tax report.

Q: What is the deadline?
A: Within 120 days after the RAR or other adjustment is final.

Q: Can penalties be waived?
A: Penalty and interest apply, but you may request a waiver of penalty and/or interest on any additional amounts due.

Citations and references

Statutes:

• Texas Tax Code Sec. 171.212(a)(1) - amended report required when net taxable earned surplus is changed by an IRS audit or other adjustment
• Texas Tax Code Sec. 171.212(b) - amended report due within 120 days after the RAR or other adjustment is final
• Texas Tax Code Sec. 111.206(f)(2) - limitations period stays open one year from the Comptroller's receipt or discovery of the IRS audit report, whichever is shorter; does not cover reports outside limitations on September 1, 1997

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200112858L

Original ruling text

December 17, 2001

To: **

Thank you for your Tax Help inquiry concerning reporting of federal audit
changes to Texas.

Section 171.212(a)(1) of the Texas Tax Code states that a corporation must file
an amended report "if the corporation's net taxable earned surplus is changed
as the result of an audit or other adjustment by the Internal Revenue Service
or another competent authority." Section 171.212(b) provides that the amended
report must be filed within 120 days after the Revenue Agent's Report (RAR) or
other adjustment is final.

Under Section 111.206(f)(2) of the Tax Code, the statute of limitations for
those reports affected by a final IRS audit will remain open for one year from
the date the Comptroller receives the IRS audit report or one year from the
date the Comptroller discovers the audit results, whichever period is shorter.
Franchise tax reports that were outside the limitations period on September 1,
1997 are not covered by Section 111.206(f)(2).

Periods previously audited by the Comptroller's Office are subject to Section
171.212. Therefore, you should file amended franchise tax reports as soon as
possible after the RAR is finalized. The phrase "Amended Report" must appear
at the top of the report. A cover letter of explanation, with enclosures
necessary to support the adjustment, should be attached to the amended report.
Although penalties and interest are imposed under the statute, you may request
a waiver of penalty and/or interest on any additional amounts due.

The statutes mentioned, as well as other related materials, are accessible
online at http://www.window.state.tx.us/taxinfo/frantax.html.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have questions about this, my internet address is
, or you may call toll-free at 1-800-531-5441,
extension 59952.

Sincerely,

Teresa Bostick
Tax Policy Division