On Aug. 6, the IRS issued final regulations addressing the partnership representative under the newly effective centralized partnership audit regime. The new regime, in which the default for collecting tax in partnership audits is at the partnership level, was enacted by the Bipartisan Budget Act of 2015 (BBA). The rules, which became effective for tax years beginning in 2018, replace the “tax matters partner” of the Tax Equity and Fiscal Responsibility Act of 1982 partnership audit regime with a “partnership representative” (PR). While final regulations on the other aspects of the new rules are being reworked by the IRS, the recently released regulations provide answers on the PR.
Importantly, the PR has sole and binding authority over all partnership matters before the IRS in audits under the BBA. The final regulations reiterate that the PR’s authority is not limited by state law or private contractual terms. Accordingly, partnerships, including LLCs taxed as partnerships, must understand how these final regulations affect their designation of a PR and must carefully consider the impact the regulations can have on the partnership itself. The final regulations clarify that the rules are not intended to prevent partnerships from using state law to restrict the PR’s authority. Partnerships should consider agreement amendments or additional legal documents to restrict PR authority as desired.
The final regulations make several important changes and clarifications to the proposed regulations. Though the IRS addressed comments and recommendations it received, it did not adopt all the feedback it received. Following are the more important of the changes and clarifications:
- The PR can engage another person to act as power of attorney, participate in meetings, and receive copies of correspondence.
- An entity, including a disregarded entity, may serve as the PR. What’s more, a partnership may designate itself as its own PR.
- When an entity (including the partnership itself) is designated as the PR, the PR must further appoint a “designated individual.”
- The “capacity to act” concept from the proposed regulations has been removed, leaving it up to the partnership to remove the PR if the partners feel the PR no longer has capacity to act as PR.
- The PR must be available and willing to meet in person with the IRS. If a PR refuses to meet with the IRS, the IRS may designate a PR on behalf of the partnership with 30 days’ notice.
- A partnership may change its PR for a given tax year only in the context of an administrative proceeding or in conjunction with the filing of a valid administrative adjustment request. A partnership also can change its PR when the partnership (not the PR) is notified that its return has been selected for exam.
- A PR’s designation can be revoked for any reason or no reason at all, and may be made by any partner of the partnership (or member of an LLC). If the PR was designated by the IRS, then IRS consent is required to revoke such designation.
- To be valid, notice of the revocation only needs to be made to the IRS, not the PR. Similarly, when a PR resigns, the PR needs to notify only the IRS and does not need to notify the partnership for the resignation to be effective.
- When a PR resigns or the partnership revokes a PR’s designation, the notice of resignation or revocation becomes effective immediately upon receipt by the IRS. Importantly, there is a lag period between when the notice of revocation is mailed and when it’s received by the IRS. If a partnership is concerned about this gap, it should consider hand-delivering the revocation to a local IRS office.
- A resigning PR (or designated individual) may not appoint his or her successor. The partnership must designated a successor PR.
- The IRS may find the designation of a PR by a partnership as being ineffective because the PR does not have a substantial presence within the U.S. or for any other reason described in published guidance, including an enumerated list in final regulations.
Given the unlimited authority a PR has on behalf of a partnership within the new audit rules and the relatively complex procedural rules governing the appointment, authority, resignation, and removal of the PR, it is important for partnerships to consider and implement the rules as soon as possible.