Naming a Partnership Representative Under New Partnership Audit Rules

| 10/18/2018

Partnerships will need to make a significant choice for the first time on their 2018 Forms 1065, “U.S. Return of Partnership Income,” to designate a partnership representative. Because the rules are new and complex, partnerships should focus on the choices they will be required to make when they file their returns.

The new centralized partnership audit regime

The new centralized partnership audit regime was enacted as part of the Bipartisan Budget Act of 2015 (BBA), effective for taxable years beginning on or after Jan. 1, 2018. Following are some important aspects of the BBA:

  • All partnerships are covered by the BBA unless a partnership is eligible to, and does, elect out of the regime.
  • Partnerships face an entity-level liability for tax due as a result of an audit, though they can make an election to require audit-year partners to pay the tax.
  • Partnerships that do not elect out of the BBA must designate a partnership representative (PR) who has sole authority to act on behalf of the partnership for purposes of the BBA.
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The draft 2018 Form 1065 includes a question requiring partnerships to consider whether to elect out of the new partnership audit regime as well as a space to designate a PR.

Partnership representative

IRC Section 6223(a) requires all partnerships that do not elect out of the BBA to designate a PR. If the partnership does not designate a PR, the IRS may designate one.

Under the regulations, a partnership must designate a PR on its return for each taxable year. The PR may be any person, including an entity, so long as the PR has a substantial presence in the U.S. Under the regulations, a PR has a substantial presence in the U.S. if the PR has a U.S. taxpayer identification number, has a U.S. street address, has a U.S. phone number, and is available to meet with the IRS at a reasonable time and place.

If a partnership designates an entity as a PR, it also must appoint a designated individual (DI) to act for the PR. The DI must have a substantial presence in the United States, and the DI’s appointment terminates when the PR designation terminates.

Generally, a PR can be changed at any time, but the regulations provide that the parties are not to notify the IRS of the change in PR until the partnership is selected for audit or the partnership files an administrative adjustment request (AAR), which essentially is an amended partnership return. However, an AAR cannot be filed solely to revoke the PR.

IRC Section 6223(b) provides that a partnership and all of the partners are bound by the actions of the PR for purposes of the BBA. Actions include, but are not limited to, extensions of periods of limitation, the decision between paying the tax and having the partners pay the tax, and settlements.

Because the PR has broad authority to act on behalf of the partnership, partnerships must take care when selecting a PR. The following should be considered when designating a PR:
  • Should the PR be a partner? If not, should the PR perform other roles for the partnership, or should it perform only the role of PR?
  • Do some or all of the PR’s actions require approval by the partnership?
  • What are the roles and responsibilities of the PR?
  • How should the relationship between the PR and the partnership be memorialized?
  • Should the partnership or LLC agreement be modified to reflect the PR’s role?

Contact us

Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax