The Treasury has issued final regulations regarding the partnership representative designation and authority under the relatively new IRS partnership audit rules. These rules became effective for tax years beginning after December 31, 2017.
Most importantly, the regulations confirm the representative has “sole authority to act on behalf of the partnership” and to bind the partnership and all partners with respect to IRS audits. This includes actions made by the representative before being terminated from the designation. Failure of the partnership representative to follow any state law, partnership agreement or other agreements has no effect on the authority of the representative or designated individual. The partnership representative has the final say with the IRS, so designating the appropriate entity and/or individual is imperative.
Below is a summary of the final regulations and guidance moving forward, as there are both tax return and partnership agreement implications to address before March 15, 2019.
Each partnership must designate a partnership representative to act on behalf of the entity in the event of an IRS audit. The representative does NOT have to be a partner of the partnership, and there can only be one designated partnership representative for a taxable year at any time. The representative remains in effect until:
The partnership representative must be designated each tax year on the partnership tax return and is only effective for that particular tax year. A partnership can choose an individual or entity to serve as its representative, as long as certain requirements are met.
Individuals serving as the partnership representative must have a substantial presence in the U.S. and be able to make themselves available to meet in person with the IRS at a reasonable time and place. They also must have a U.S. taxpayer ID number, street address and phone number. If the representative fails the U.S. presence test, they remain the representative until they resign, or their designation is revoked by either the partnership or the IRS.
A partnership also may designate itself, another entity or a disregarded entity to be its partnership representative. If an entity is designated, it also must appoint a designated individual through whom it will act. The designated individual, who also must pass the U.S. presence test, must be appointed at the same time as the entity representative.
Note that a power of attorney cannot be used to designate a partnership representative.
The representative or designated individual may resign for any reason by notifying the IRS in writing. The resignation can only occur after the IRS issues a notice of administrative proceeding. Once an entity partnership representative resigns, the designated individual is no longer in effect, and vice versa. The resigning representative is not allowed to designate a successor.
Similarly, the partnership may revoke partnership representative or designated individual status for any reason by notifying the IRS in writing and designating a successor representative. The revocation process begins only after the IRS issues a notice of selection for examination or a notice of administrative proceeding, or if the partnership files a valid administrative adjustment request. Revocation must be signed by a person who was a partner at any time during the partnership’s taxable year to which the revocation relates. Once an entity partnership representative is revoked, the designated individual is no longer in effect.
The IRS is allowed to seek out information to establish if a partnership has in fact designated a partnership representative. If it does so and determines one has not been designated or doesn’t meet the requirements, the IRS will notify the partnership — giving it 30 days from the mailed notification date to designate a representative. Absent action within that 30-day window, the IRS will designate one using a host of determining factors.
It’s interesting to note the partnership may revoke an IRS designation if the partnership requests and receives permission to do so from the IRS.
Partnerships must designate a partnership representative and appoint a designated individual, if applicable, beginning on the 2018 tax return and each year after.
Additionally, it’s important to work with your legal advisors to amend the partnership agreement to not only name the representative but also to create any restrictions or guidelines the representative must follow in making decisions on behalf of the partnership. While the IRS will still take the representative’s decision as binding, having language in the agreement will provide guidance as well as give partnerships support if the representative does not abide by the agreement. Consider making these important amendments now, as they must be made by March 15, 2019.
It’s also important to note that states have a stake in this as well and may or may not conform to the federal IRS audit rules. For example, California already has passed legislation to generally confirm these rules; however, there are some differences from the federal rules. As most states likely will apply these rules differently, it’s also important to understand how your state in particular will or will not apply them.
Please contact a member of your service team, or contact Donna Weaver at dweaver@cohencpa.com for further discussion.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.