On January 1, 2018 the centralized partnership audit regime went into effect. The regime made significant changes in the procedures used by the IRS to conduct partnership audits, by allowing the IRS to make adjustments and collect tax at the partnership level rather than at the level of the individual partners. To assist with the administration of the audit, the regime did away with the Tax Matters Partner, and instead provides that the partnership designate a “partnership representative.” Under the proposed regulations, the partnership representative may be a non-partner. However, the partnership representative will have broad authority to act on behalf of the partners.
On Monday, August 6th the IRS issued final regulations regarding the designation and authority of the partnership representative. The final regulations make a number of changes to the proposed regulations.
Eligibility to Serve as a Partnership Representative
The final regulations clarify that:
- a disregarded entity can serve as a partnership representative; and
- a partnership may designate itself as its own partnership representative.
In either case, the entity must have substantial presence in the United States and also appoint a designated individual that has a substantial presence in the United States to act on the entity's behalf as partnership representative. In addition, the final regulations remove the capacity-to-act requirement contained in the proposed regulations because the partnership should have as much flexibility as possible in determining a partnership representative so long as the person meets the substantial presence in the United States requirements.
Time for Changing the Partnership Representative
The final regulations allow the partnership to change the partnership representative through revocation when the partnership is notified that the partnership return is selected for examination as part of an administrative proceeding in addition to when the notice of administrative proceeding (NAP) is mailed. Under the proposed regulations, the partnership was not able to change the partnership representative until it received the NAP.
Resigning Partnership Representative
The final regulations remove the ability of a resigning partnership representative or designated individual to designate a successor. Because it is unfair to the partnership to allow a resigning partnership representative to request adjustments to items of a partnership, the final regulations also have been revised to prohibit a resignation at the time of the filing of an administrative adjustment request.
Among the additional changes contained in the final regulations are changes to:
- the ability to revoke partnership representative status;
- the effective date of a revocation or resignation of a partnership representative;
- notification requirements for resigning partnership representation or revocation of partnership representation designation; and
- IRS designation of a partnership representative.
If not already done so, partners should consider amending the partnership agreement to designate a partnership representative, or provide a procedure for such designation. The agreement must be amended prior to the original due date (not the extended due date) of filing the 2018 partnership tax return, for the amendment to be effective for the 2018 tax year.
If you have questions, please contact Angelina Milo at firstname.lastname@example.org. You can also reach out to your Meaden & Moore representative directly.