As a result of the passing of the Bipartisan Budget Act of 2015 (BBA) enacted into law on November 2, 2015, the current rules governing partnership audits will be replaced with a new audit regime. Under the new audit regime, the position of Tax Matters Partner (TMP) has been replaced by the position of Partnership Representative (PR). The new rules are generally effective for partnership taxable years beginning after December 31, 2017 but partnerships may elect for parts of the regime to apply to the taxable year ending December 31, 2017. The partnership agreement should be amended to reflect the change from tax matters partner to partnership representative. The partnership agreement cannot change the ultimate authority given to the PR but can include how the PR is appointed or removed and what actions the PR must take when making binding elections or agreements.
The TMP and the PR are the person designated to act as an intermediary between the IRS and the partnership if an audit shall arise. The TMP had to be a general partner and non-partners could not be elected even if that person had the most knowledge of the partnerships matters. The TMP has the authority to make decisions that are binding to the partnership, but the position did not have the authority to bind individual partners.
Section 6223 has been amended as a result of the BBA to set the rules for the designation of a PR. The PR can be any person that has a substantial presence in the United States. The PR can be a partner, non-partner, or entity including the partnership’s management company. If the PR is an entity, the entity must appoint an individual to act on the entity’s behalf.
The PR has the sole authority to act on behalf of the partnership in agreeing to settlements, notices of final partnership adjustments, and making partnership elections in regards to audit adjustments. No other partner or person may participate in an audit examination or proceeding involving the partnership without the permission of the IRS. The partnership, as well as all partners, are bound by the actions of the PR and any final decisions made by the PR in the course of an IRS audit.
The PR must have a substantial presence in the United States. In order to qualify, the PR must be available to meet in person with the IRS at a reasonable time and place, maintain a U.S. street address and a telephone number that can be called during normal business hours, and have a U.S. Taxpayer ID number (TIN). If an entity is elected the individual appointed to act on behalf of the entity must satisfy the substantial presence requirement.
The position of Partnership Representative must be designated separately for each taxable year and is only effective for the taxable year of the election. The designation of the PR must be made on the annual partnership tax return and becomes effective on the date the return is filed. If a PR is not named, the IRS will designate a PR if the partnership were to be audited.
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