New Partnership Representative Requirements
In 1982, the Internal Revenue Service and U.S. Department of the Treasury enacted the Tax Matters Partner law, requiring every partnership to designate an individual as a tax matters partner. This person would then be responsible for handling all of the partnership’s tax examination issues. Under the law, the tax matters partner was responsible for completing and filing all tax documents on behalf of the partnership at the end of every fiscal year.
With the passing of the Bipartisan Budget Act (BBA) of 2015, however, the Tax Matters Partner was eliminated and the role of Partnership Representative went into effect, beginning with 2018 tax filings. As per the legislation, the Partnership Representative was also given broad authority to settle the audit with the IRS and the responsibility to serve as a Designated Individual during a tax examination.
The goal of the new audit rules was to enable the IRS to do the following: streamline communication with partnerships; increase the number of partnership audits; help collect taxes from partnerships; and position the IRS to manage the growing number of partnerships. The BBA changes include filing adjustments at the partnership level, and any additional taxes, penalties, and interest are also now computed and paid at the partnership level. The appointment of a Partnership Representative applies to all partnerships that file U.S. tax returns, including foreign entities, as well as U.S. LLCs or partnerships.
Partnership Representative requirements:
- Must be a person and can include an individual,
trust, estate, partnership, association, or corporation
- If an entity is named as the Partnership Representative for the partnership, a Designated Individual must also be named.
- Must have a substantial U.S. presence―be a U.S. citizen, be principally located in the U.S., have a physical U.S. address, have a phone number
Certain partnerships also have the choice to opt out, provided they meet one of the following requirements:
- Have less than 100 partners
- Do not have a direct partner that is a partnership, trust, or disregarded entity
Note: The IRS may revisit the definition of an eligible partner after it gains further experience with the new partnership audit regime.
If a partnership elects out of the partnership rules, it will be subject to pre-BBA rules, which audits every partner separately.
The Partnership Representative is designated with each year’s tax filing, and a partnership can only change the designated representative if an audit letter has been sent by the IRS. Once under audit, there are procedures the Partnership Representative must follow if they wish to resign or if the partnership wishes to replace them. When a tax examination commences, the IRS notifies the Partnership Representative, who in turn alerts them to the IRS notification. The partnership then has the option to revoke the Partnership Representative at that time and suggest a new Partnership Representative for IRS consideration, or allow the Partnership Representative to manage the audit process and work with the tax and legal professionals engaged by the partnership. If the IRS doesn’t accept the revocation and the new Partnership Representative, the IRS may appoint one. Once the final Partnership Representative is named, that person must remain with the partnership until the tax examination concludes.
Duties of the Partnership Representative:
- Given broad authority for the partnership, assuming all responsibility in the audit, and taking on a significant fiduciary role
- May settle a tax examination on behalf of the partnership and extend the partnership statute of limitations
- May bind all partners to a settlement agreement, decline to challenge/contest all or part of an adjustment, and make any and all decisions on paying tax, including the push-out election (binding authority)
- Are not required to consult or receive approval of actions from the partners
- Are able to hire an attorney, accountant, or other professional to work on their behalf at the expense of the partnership
- Are able to direct advisors, hire all experts, bind the partnership, require direct access to the books and records, and can charge the partnership for their time
Considerations When Selecting a Partnership Representative:
- Partnership Representative’s actions are conclusive and binding on partnership
- Non-Partnership Representative partners have no per-se right to participate in IRS matters
- The Partnership Representative must not have any conflict of interest
- The partnership is responsible for paying all of the IRS audit changes effectuated in a tax examination
- If no Partnership Representative is provided on the tax return, or the partnership does not have a substantial U.S. presence, the IRS will appoint a Partnership Representative to the partnership. Additionally, there is a 90-day period after the IRS designates a Partnership Representative for the partnership to find their own.
Talk to your legal advisors to determine if your partnership agreement may be required to address the new audit rules. If you’re interested in learning more about how CSC can help you with these new regulations, please visit our Partnership Representative Services page.