Posted by Abbey Garber and Jessica Kirk
The Bipartisan Budget Act of 2015 (“BBA”) introduced a centralized partnership audit regime which replaced the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). The BBA streamlined partnership audits (including audits of limited liability companies taxed as partnerships) by providing for the assessment and collection of tax at the partnership level.
For tax years after 2017, the BBA replaced the “tax matters partner” with the “partnership representative.” The partnership representative would represent the partnership in an audit or IRS examination and has the sole authority to act on the partnership’s behalf. Unless a partnership is able to elect out of the BBA procedures, each year a partnership must designate a partnership representative and, if applicable, a designated individual, on its partnership tax return Form 1065, U.S. Return of Partnership Income.
Because of the broad authority given to partnership representatives under the BBA and because of the limited circumstances under which such designation can be changed, partnerships should carefully consider who they will appoint as the partnership representative on their 2019 and subsequent tax returns. The extended deadline for filing a 2019 partnership tax return is September 15, 2020.
Partnership Representative Authority and Obligations
The partnership representative provisions of the BBA require partnership-level (as opposed to partner-level) resolution and liability of all items of an IRS audit or dispute of partnership income, deduction, gain, loss, or credit. Under the BBA and related Treasury Regulations, the partnership representative is given the broad and sole authority to act on behalf of the partnership in a partnership-level audit and any judicial proceedings. In any such audit or proceeding, the partnership representative can bind both current and former and direct and indirect partners, and the partners do not have the right to participate in the proceeding or receive notice of the proceedings from the IRS. Unless a push-out election is made, the partnership is liable for tax adjustments made in the course of an audit and this liability can indirectly apply to partners, including those partners who were not partners during the tax years under audit.
The partnership representative’s authority includes, but is not limited to, the authority to extend the statute of limitations, to enter into a settlement or agree to a final partnership adjustment, and to make an election to push-out the adjustments to the partners. The partnership representative’s broad authority may not be limited by state law or any agreement (including the partnership agreement). Thus, even if the partnership agreement contractually limits the right of the partnership representative to extend the statute of limitations, for example, an extension by the partnership representative would still be valid.
Partnership Representative Eligibility
The partnership representative is not required to be a partner in the partnership. The only requirement is that the partnership representative have a “substantial presence” in the United States. A person has a substantial presence in the United States if: (1) the person makes themselves available to meet in person with the IRS in the United States at a reasonable time and place; (2) the person has a U.S. street address and telephone number; and (3) the person has a U.S. taxpayer identification number. An entity (including a disregarded entity and the partnership itself) or an individual can be designated as the partnership representative. If an entity is designated as the partnership representative, the partnership must identify and appoint a “designated individual” who has a substantial presence in the United States to act on the entity’s behalf.
Partnership Representative Designation
The partnership designates the partnership representative on its tax return each year, and a designation for one year is not effective for any other taxable year. Once a partnership representative is designated on the tax return for a particular tax year, it cannot be changed unless (1) the partnership files an administrative adjustment request (“AAR”) for such year (and such AAR cannot be filed for the sole purpose of changing the partnership representative) or (2) the IRS notifies the partnership that its return has been selected for audit. If there is no designation of a partnership representative in effect, the IRS may select any eligible person to serve which could undesirably result in the granting of broad authority over the partnership’s tax matters to an unintended recipient.
Practitioners generally agree that it is in everyone’s best interest to have a partnership agreement designating and indemnifying a partnership representative and, if applicable, a designated individual, prior to the due date of the Form 1065. In fact, the American Institute of Certified Public Accountants (“AICPA”) has advised accountants to confirm that partnerships have appointed a partnership representative in their partnership operating documents before signing and submitting the partnership’s Form 1065. Thus, accounting firms may require that partnerships amend their partnership agreements before signing and submitting a Form 1065. A prior TK Client Alert addresses considerations to be made when amending existing partnership agreements to comply with the BBA and appoint or change a partnership representative.
Since the partnership representative is given broad authority over a partnership’s tax matters and because such designations can only be changed under limited circumstances, it is important that partnerships carefully consider who to designate each tax year. Please contact the above authors or the TK tax attorney with whom you regularly work if you have any questions or need assistance.
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