Not only did the Bipartisan Budget Act of 2015 (“New Partnership Audit rule”) replaced the responsible party for a tax audit, it also mandates that partnerships to designate a partnership representative on the partnership’s 2018 return. Previously under TEFRA, a partnership would designate a general partner (or member in case of an LLC) as the tax matters partner (TMP), who would act on behalf of the partnership. For example, rather than contacting every partner in the partnership, the IRS can simply reach out to the TMP in case of any tax discrepancy.
The replacement of a TMP with a partnership representative is not merely a change in name, but it also expanded the partnership representative’s authority to include the power to bind the partnership and all partners to any audit determination. Thus, a partnership should ensure that the representative is well qualified and will act in the best interest of the partnership and its partners.
Representative Requirements: Unlike the rigid restrictions on who all can be a TMP, the new regulations provide far more flexibility for a partnership representative. In fact, the rules allow any individual or entity may be selected as the partnership representative. However, if an entity is chosen as the partnership representative, a "designated individual" must be selected from within the entity to work with the IRS in the event of a partnership audit. The individual or entity can come from outside of the partnership (including an outside CPA or tax attorney). Additionally, a partnership can even select itself as its own partnership representative.
The main restrictions for a partnership representative is that the representative must have substantial presence in the United States, which includes:
A taxpayer identification number,
A telephone number,
A postal address, and
The representative must make itself reasonably available to meet and communicate with the IRS.
Make the right call:
Once the partnership has designated its representative for a particular tax year, the designation cannot be changed until the partnership receives notice of its selection for audit. On the bright side, a partnership representative's powers and responsibilities only goes into effect after partnership is selected for audit.
Should the partnership no longer feel confident in its representative, the partnership can revoke the representative's authority by filing form 8979, Partnership Representative Revocation, Designation and Resignation Form. With these changes, it is even more important that addresses are updated so that any audit contact from the IRS is addressed timely and efficiently.
The Takeaway:
We recommend that the partners become aware of this new requirement. If a partnership representative is selected, make sure the person understands that he or she has the power to bind all the partners, and not just him/herself (if he or she is a partner). The partnership should carefully select a representative that is capable of representing the partnership and all of its partners.
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