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On April 15, 2022, Governor Tommy Evers signed Senate Bill 794 (2022 WI SB 794), changing the rules governing audits of pass-through entities (PTEs) by the Wisconsin Department of Revenue (WI DOR). For purposes of 2022 WI 794, PTEs include partnerships, limited liability companies and tax-option (S) corporations. These rules do not apply to PTEs that have elected to be taxed at the entity level under legislation enacted in 2018 (see Tax Alert 2018-2521).

2022 WI SB 794 is intended to reduce the administrative burdens for both the WI DOR and taxpayers. 2022 WI SB 794 allows the WI DOR to do the following:

• Assess¹ and collect additional tax from a PTE² on income otherwise reportable by the PTE's members
• Direct the Secretary of the Wisconsin Department of Administration to refund to a PTE its portion of the overpayment
• Assess an adjustment to reduce a PTE's tax credit if it previously computed the credit and reported it to its members
• Assess an adjustment to increase a tax credit to offset additional tax assessed to a PTE
• Assess any pass-through member of a PTE for its allocated portion of additional collective tax owed by one or more of the PTE's members
• Disclose to a member that the PTE has been audited when necessary to explain amounts assessed to a member
• Disclose to a PTE that one or more members have not reported the Wisconsin income from the PTE when necessary to explain amounts assessed to the PTE based on nonfiling or unreported income of members

2022 WI SB 794 requires a PTE and/or its members to take several actions. A PTE must designate a tax matters member similar to that required by the federal PTE audit rules in IRC Section 6223(a). If the PTE receives a federal audit determination assessed at the entity level, the PTE must report³ the federal adjustments to the WI DOR within 180 days of the date the PTE received the determination from the IRS. In addition, the PTE may submit, within 60 days of receiving the determination, a request to the WI DOR to amend the partnership returns and pay the tax on behalf of its members

Under Wisconsin law, a bill is published the day after the Governor has signed it and becomes effective the day after it is published by the Legislative Reference Bureau, unless the bill text specifies an effective date. No effective date is specified in 2022 WI SB 794.

Implications

PTEs and their members that are subject to Wisconsin income taxes will need to consider these new state audit rules if they receive federal audit adjustments. PTEs with 25 or fewer individual members may want to consider electing out of the new provisions.

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ENDNOTES

¹ A PTE may file a petition for redetermination within 60 days of receiving the determination. The WI DOR will make a redetermination within six months after the date the petition was filed.

² 2022 WI SB 794 allows PTEs with up to 25 members to elect to require the WI DOR to assess the members rather than the PTE. The election must be made within 60 days after receiving the WI DOR's audit determination. PTEs may not qualify for this election if one or more of its members are PTEs.

³ This requirement does not apply unless the federal adjustments affect the amount of Wisconsin income tax, credit, or net operating or capital loss carried forward.