The Bipartisan Budget Act (BBA)'s centralized partnership audit regime is now in effect. Partnerships filing 2018 taxable year returns should be aware of the BBA rules and familiarize themselves with the requirement to designate a partnership representative (“PR”). The PR has the sole authority to act on behalf of the partnership under the BBA regime, including during audits, before appeals, in litigation, and when filing an amended partnership return. All entities, including limited liability companies, that are required to file a partnership return under section 6031(a) are subject to the BBA rules, as are entities that file a partnership return even if the entity is not a partnership or there is no entity. Certain partnerships with 100 or fewer partners may elect out of the BBA regime if they meet certain eligibility requirements and follow the election out procedures.
Each partnership subject to the BBA regime must designate a PR on its 2018 Form 1065. If the partnership chooses an entity as the PR, the partnership must also appoint a “designated individual” who will act for that entity. When designating the PR or appointing a designated individual, the partnership must provide the person’s name, U.S. address, U.S. telephone number, and U.S. Taxpayer Identification Number. Both the PR, and the designated individual if applicable, must make themselves available to meet with the IRS in person in the United States as determined to be necessary by the IRS. A PR may be, but is not required to be, a partner in the partnership.
Failing to designate a PR on the Form 1065 may allow the IRS to choose one instead. If the IRS selects the partnership return for audit, and there is no PR designated on the partnership return, the IRS will initiate procedures to select a PR who will act on behalf of the partnership. Before selecting the PR, the IRS will give the partnership 30 days to designate a PR; partnerships who have not designated a PR or whose PR designation is no longer in effect should consider identifying a new PR in advance because 30 days might not be a sufficient amount of time for the partnership and its partners to identify and agree on a PR.
Partnerships that file electronically should also be aware that the inclusion of some, but not all, of the information required for the PR will prevent the return from being qualified by return preparation software. For example, a missing address for the PR will prevent the return from being able to be submitted electronically.
Once an exam begins or when the partnership is amending its return, the partnership may designate a PR by using Form 8979, Partnership Representative Revocation, Designation, and Resignation Form. This form can also be used to revoke a PR that was identified on the initial Form 1065. If the partnership is revoking the PR or the partnership is making an initial PR designation, a partner with authority to revoke or designate the PR must sign the Form 8979. The partner must attest to this authority under penalty of perjury. The Form 8979 may also be used by the PR to resign as the partnership representative.
Any actions taken by the PR during the IRS audit will bind the partnership and all of its partners. For example, a settlement agreement entered into by the PR on behalf of the partnership, or a decision not to challenge an IRS notice of final partnership adjustment, will bind all partners in the partnership. Moreover, except for a partner that is the PR, no partner or any other person may participate in the IRS exam unless otherwise permitted by the IRS and no partner other than the PR may file an Administrative Adjustment Request on behalf of the partnership. However, this rule does not prevent the PR from authorizing a power of attorney to represent the partnership before the IRS during the audit.
For more information, please contact Greg Armstrong at 202-533-8816.