AAFCPAs would like remind clients that, effective for tax years beginning after December 31, 2017, the IRS has instituted new centralized partnership audit rules under the Bipartisan Budget Act (BBA) of 2015. As mentioned in a prior blog, these rules introduced the role of a Partnership Representative and provide for the assessment and collection of tax (including penalties and interest) to be at the partnership level.
Collection of the tax will be at the highest applicable tax rate; however, there are provisions to account for tax-exempt as well as potentially reduced rates for C corporation partners. Eligible partnerships (including LLCs, LLPs, etc.) may elect out of these rules if they are considered a “small partnership” with fewer than 100 partners and the partners are either individuals, C corporations, foreign entities that would be treated as a C corporation if it were domestic, an estate of a deceased partner, or an S corporation. This is an annual election that must be made on a timely filed return.
Alternatively, partnerships ineligible for the “opt-out” election (primarily partnerships that have trusts or other partnerships among their ownership group) may make a “push-out” election to push-out audit adjustments and collection of tax to the applicable partners. The Partnership Representative (explained below) is then required to provide, to the partners, their share of the adjustment to items of income, gain, loss, deduction, or credit so they may amend their respective tax returns. This election must be made within 45 days of the final partnership adjustment.
Identifying a Partnership Representative
As a reminder, the title “Partnership Representative” will replace the “Tax Matters Partner.” This individual will have the authority to act on behalf of the partnership and will provide the IRS with a direct line of communication with respect to an audit or other proceeding.
Currently, most partnership agreements provide for, and specifically identify a Tax Matters Partner, which was the required designation through the 2017 tax year. AAFCPAs encourages clients to have internal conversations deciding who will be designated as the Partnership Representative. This is required to be reported on the entity’s 2018 tax return.
Furthermore, given the level of authority in the hands of this individual, AAFCPAs also encourages clients to consider amending partnership and operating agreements to include specific language concerning a Partnership Representative. This may include designating who has this authority, and in what situations certain elections are made. Clients should designate a Partnership Representative to ensure appropriate oversight and representation with respect to IRS audits and other proceedings. The Partnership Representative does not have to be a current partner; however, the individual must have a “substantial presence” in the United States as defined in the Code.