The Bipartisan Budget Act of 2015 (BBA) created a new centralized partnership audit regime effective for taxable years beginning on or after January 1, 2018. Under IRC Section 6223(a) partnerships that can’t (or can, but don’t) elect out of the Bipartisan Budget Act need to designate a partnership representative (PR) for each taxable year. The IRS will appoint one if the partnership does not.
PR’s may be an entity or an individual who spends a majority of time in the U.S., has a U.S. taxpayer identification number, a street address and a telephone number. The PR also has to be available to meet with IRS representatives when required but does not need to be a partner of the partnership.
The PR has the sole authority to act on behalf of the partnership in:
- Litigation in court of disputed tax adjustments
- The conduct of administrative practice before the IRS; including appeals to the Appeals Office and request for Private Letter Rulings
- Any inquiry into the examination of the partnership’s tax returns
Needless to say, it’s critically important that partnerships take time and exercise careful thought when selecting a PR.
In addition, if the PR is an entity, the partnership also must appoint an individual (DI) who can act for the PR. As is the case with the PR, the DI also must have a substantial presence in the U.S.
Partnerships should consult with their attorney when updating their operating agreements to address these changes. Language in the partnership agreements, such as the designation of a Partnership Representative, types of partners allowed by the partnership, and the tax impact of buy-sell provisions on the partners, should be evaluated to make sure they achieve the goals of the partners.
If you have questions about the new partnership audit rules or rules concerning selecting a partnership representative, please contact your Mize Houser tax professional or Yvonne Brownell, CPA, CMA, CGMA.