Lena Rozzi, CPA •
The Role of the Partnership Representative and What It Means to Your Business
The Bipartisan Budget Act of 2015 (BBA) made significant changes to the rules governing federal partnership tax audits by allowing the IRS to audit and determine, assess, and collect any tax due, including any corresponding penalties and interest, at the partnership level. Under the previous rules, the IRS could audit a partnership, but could only assess and collect any tax due at the partner level. These changes are expected to result in dramatically increased audit rates for partnerships.
The Role of the Partnership Representative and What It Means to Your Business
The Bipartisan Budget Act of 2015 (BBA) made significant changes to the rules governing federal partnership tax audits by allowing the IRS to audit and determine, assess, and collect any tax due, including any corresponding penalties and interest, at the partnership level. Under the previous rules, the IRS could audit a partnership, but could only assess and collect any tax due at the partner level. These changes are expected to result in dramatically increased audit rates for partnerships.
The Partnership Representative
Under the new BBA rules, partnerships will need to designate an individual who will be responsible for acting on behalf of the partnership on all aspects of its tax matters with the IRS, including, but not limited to meeting, negotiating, and entering into settlement agreements. This individual, known as the partnership representative, is the sole party authorized to act on behalf of the partnership in any tax examination, and such authority may not be limited by state laws or any other document or agreement. Essentially, the partnership and all partners are bound by the actions of the partnership and partnership representative and by any final decision in a proceeding under the new rules.
Eligibility
Anyone can be a partnership representative as long as they meet the requirements of Reg. Section 301.6223-1(b), including a disregarded entity or the partnership itself, as long as there is a qualified “designated individual” appointed to act on behalf of the entity. In effect, the “designated individual” will act as the partnership representative; they carry the same powers as the partnership representative and are subject to the same resignation or removal processes.
Partnership Designation or Changing of the Partnership Representative
Designation of the partnership representative is made relevant for each taxable year on the partnership’s tax return, however, the designation can be changed at any time, with IRS consent, or preceding a tax examination. If the partnership representative has resigned or changed from the individual shown on the partnership return for the taxable year under examination, a written revocation may be signed by any partner or LLC member. The revocation can be made for any reason, except for when a designation is made by the IRS, in which case, IRS consent must be obtained. Any revocations are effective immediately upon receipt by the IRS or acknowledgement by the IRS that the revocation was valid if the designation was made by the IRS.
IRS Designation of the Partnership Representative
While partnerships have the primary responsibility of selecting their representative, the IRS can make its own determination if they deem a designated partnership representative is not in effect, such as instances where the individual does not meet the substantial presence test or is incarcerated.
The new rules also allow the IRS to take control over the partnership representative selection under the “multiple revocations” rule if they receive multiple partnership representative revocations within a 90-day period. Therefore, it is crucial that partnerships ensure control over representative revocations as any partner or LLC member is allowed to sign a revocation.
What Should You Do Now?
To help prepare for these changes under the partnership audit rules, all partnerships should be proactive in planning and selecting their partnership representative to help mitigate any unfavorable consequences. Due to the responsibilities encompassed in this role, and the power to act on behalf of the partnership, every partnership should strongly consider the designation of the partnership representative to the appropriate individual and consider amending and drafting their partnership agreement if it does not already include provisions relating to the designation of the partnership representative.
The partnership audit rules generally apply to partnership returns beginning for the 2018 tax year so if your partnership has not already considered designating the partnership representative, now is the time to discuss with the partners and your trusted tax advisors. As partnership audits commence under the new rules, addressing these changes now can significantly lessen the impact of your business in the future.
Under the new BBA rules, partnerships will need to designate an individual who will be responsible for acting on behalf of the partnership on all aspects of its tax matters with the IRS, including, but not limited to meeting, negotiating, and entering into settlement agreements. This individual, known as the partnership representative, is the sole party authorized to act on behalf of the partnership in any tax examination, and such authority may not be limited by state laws or any other document or agreement. Essentially, the partnership and all partners are bound by the actions of the partnership and partnership representative and by any final decision in a proceeding under the new rules.
Eligibility
Anyone can be a partnership representative as long as they meet the requirements of Reg. Section 301.6223-1(b), including a disregarded entity or the partnership itself, as long as there is a qualified “designated individual” appointed to act on behalf of the entity. In effect, the “designated individual” will act as the partnership representative; they carry the same powers as the partnership representative and are subject to the same resignation or removal processes.
Partnership Designation or Changing of the Partnership Representative
Designation of the partnership representative is made relevant for each taxable year on the partnership’s tax return, however, the designation can be changed at any time, with IRS consent, or preceding a tax examination. If the partnership representative has resigned or changed from the individual shown on the partnership return for the taxable year under examination, a written revocation may be signed by any partner or LLC member. The revocation can be made for any reason, except for when a designation is made by the IRS, in which case, IRS consent must be obtained. Any revocations are effective immediately upon receipt by the IRS or acknowledgement by the IRS that the revocation was valid if the designation was made by the IRS.
IRS Designation of the Partnership Representative
While partnerships have the primary responsibility of selecting their representative, the IRS can make its own determination if they deem a designated partnership representative is not in effect, such as instances where the individual does not meet the substantial presence test or is incarcerated.
The new rules also allow the IRS to take control over the partnership representative selection under the “multiple revocations” rule if they receive multiple partnership representative revocations within a 90-day period. Therefore, it is crucial that partnerships ensure control over representative revocations as any partner or LLC member is allowed to sign a revocation.
What Should You Do Now?
To help prepare for these changes under the partnership audit rules, all partnerships should be proactive in planning and selecting their partnership representative to help mitigate any unfavorable consequences. Due to the responsibilities encompassed in this role, and the power to act on behalf of the partnership, every partnership should strongly consider the designation of the partnership representative to the appropriate individual and consider amending and drafting their partnership agreement if it does not already include provisions relating to the designation of the partnership representative.
The partnership audit rules generally apply to partnership returns beginning for the 2018 tax year so if your partnership has not already considered designating the partnership representative, now is the time to discuss with the partners and your trusted tax advisors. As partnership audits commence under the new rules, addressing these changes now can significantly lessen the impact of your business in the future.
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