Howard, LLP

Howard Insights: Partnership Representatives to Replace Tax Matters Partners

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The IRS has continuously had its budget cut and is struggling to keep up with public demand.  It’s not uncommon to be on hold for over an hour when trying to speak with a live person at the IRS.  Thus, the Centralized Partnership Audit Regime was enacted to assess and collect tax at the partnership level rather than reaching to multiple individual taxpayers.  These rules apply for taxable years beginning after 12/31/17.

What’s the big deal?

  • What if you have an audit in 2022 on a partnership that closed in 2019? Which partners would pay the tax, penalties and interest?  Can you reach out to all of them and request money back?
  • What if you have an audit in 2024 for the tax year 2021 and in those 3 years the partnership had major transfers of interest? Would the Partnership Representative try to claw back money from former partners?  Would the current partners be on the hook for the prior year taxes and the cost of battling the audit?

Who makes the decisions of the many “what if” scenarios that could arise? 

Under the old law, a partnership could only designate a general partner as its Tax Matters Partner (TMP). In recent years, a new line item on the partnership tax return was added to include a specific person who represented the TMP.  A phone number was required. Then, a social security number was required.  What has the IRS been up to?  These changes and additions lead to the new Partnership Representative requirement.  What is a Partnership Representative and how does it differ from a TMP?

A Partnership Representative does not have to be a partner.  A Partnership Representative will act on behalf of the partnership and must make decisions acting as fiduciary with the best interest of partnership in mind.  What is fair for one partner may not be fair to another partner but it’s the overall picture that counts.  These “what if” scenarios must be weighed very carefully.  This responsibility of being a Partnership Representative is more involved than simply being a TMP.

Characteristics of the Partnership Representative:

  • Sole authority to act on behalf of the partnership, including examination and judicial proceedings.
  • Only one partnership representative for a taxable year.
  • Any person eligible to serve if have substantial U.S. presence.
  • An entity may serve but must have a “Designated Individual” with substantial U.S. presence.
  • Section 6223 Regulations (Partnership Representative) are final.

What if no Partnership Representative is appointed?

  • The IRS will choose one for you. Do you really want to leave this big decision to an IRS agent?

Can I resign as Partnership Representative if I change my mind?

  • Yes, in many circumstances but the IRS must be notified of a resignation or revocation. In some instances, you may not be able to resign.

Is there an Opt-Out Election?

  • Yes, but there are limitations to which partnerships can opt out.

What do I need to do now?

  • Call your attorney/CPA to discuss the Partnership Representative role and any potential personal liabilities that could arise when acting as the Partnership Representative.
  • Talk with your partners and decide on the best person to be your Partnership Representative.
  • Call your attorney to amend your partnership agreement to appoint the Partnership Representative, and include verbiage to protect the Partnership Representative from personal liability.
  • Call your CPA and tell them who has been appointed as your Partnership Representative and provide them a copy of your revised partnership agreement.

Please let us know if we can assist with any questions, as our team looks forward to the opportunity to help you.