The IRS and Treasury issued final regulations (T.D. 9839
) on Aug. 6 that set forth the rules governing a partnership’s designation of a partnership representative (PR) and/or a designated individual (DI), as well as the authority of the PR or DI to represent a partnership in an examination.
Under the centralized partnership audit regime enacted under the Bipartisan Budget Act of 2015 (BBA), which is in effect for partnership taxable years beginning after Dec. 31, 2017, partnerships subject to the law will be required to designate a PR and/or a DI, who will have the sole authority to act on behalf of the partnership for purposes of an examination under the BBA. The BBA shifts the burden for assessing and collecting tax after a partnership-level adjustment from the IRS and to the partnership and its partners.
The final regulations modify aspects of proposed regulations (REG-136118-15
) that were issued in 2017. In particular, the final regulations address numerous public comments and clarify portions of the proposed regulations relating to the eligibility of a person to serve as the PR, designating and changing a PR, and the binding effect and authority of the PR.
Under the proposed regulations, the partnership had the ability to designate any person that has substantial presence in the United States and who had the capacity to act. In response to public comments, the final regulations remove the capacity-to-act requirement to provide partnerships flexibility to decide who can best represent them before the IRS. Additionally, the final regulations specify that a PR must make themselves available to meet in person with the IRS, citing the ability to help facilitate communications. The final regulations also clarify that both a disregarded entity and the partnership itself may serve as the PR provided they meet the substantial presence requirement under the final regulations.
Under the proposed regulations, a PR could only be changed by the partnership after the IRS mailed the partnership a notice of administrative proceeding (NAP), or upon the filing of an administrative adjustment request (AAR) by the partnership. The IRS rejected suggestions that a partnership be able to change its PR at any time, citing burdens on both the IRS and partnerships to do so. However the IRS modified the proposed regulations to provide that the partnership may also revoke its PR designation when it is notified that the partnership return is selected for examination. The notice of selection of examination is mailed to the partnership prior to the NAP.
In addition, the final regulations also modify the proposed regulations to provide that when a PR resigns, he or she may not designate a PR or DI as a successor. In addition, the PR may not resign through the filing of an AAR. Citing the potential for adverse consequences to the partnership by the actions of a PR, the final regulations state that the PR may only resign after a NAP has been issued by the IRS, or at such other time prescribed in guidance.
With respect to the revocation of a PR’s designation, the proposed regulations stated such actions could be taken by the general partner of a partnership or member-manager of a limited liability company. The final regulations changed that proposed rule to say that any partner who was a partner at any time during the taxable year to which the revocation relates to can revoke the PR’s designation, so long as they can certify that they have the authority. The regulations state that this change “provides maximum flexibility to the partnership to determine which partners should have that authority.” Importantly, this may result in the adverse consequence of multiple partners claiming the authority to revoke a PR’s designation and, moreover, actually making multiple revocations. As a result, the IRS could determine that a designation is not in effect through the multiple revocations provisions of Treas. Reg. Sec. 301.6223-1(f)(2)(v). Those provisions were modified by the final regulations to provide the IRS the option to exercise its discretion solely when multiple revocations are received within a 90-day period.
Another issue that the final regulations address is the effective date of a PR’s resignation or revocation. Under the proposed regulations, the revocation or resignation was effective 30 days from the date on which the IRS received written notification of the resignation or revocation. The IRS, taking into account public comments, revised the regulations to provide that the PR’s resignation or revocation is effective immediately upon receipt by the IRS. In addition, the final regulations clarify that the IRS will notify the appropriate parties of its acceptance within 30 days. However, the failure of the IRS to send a notification to acknowledge receipt of a valid revocation or resignation does not invalidate such revocation or resignation.
The final regulations also address the issue of the PR’s authority to bind the partnership and its partners, but do not make substantial changes from the proposed regulations. The IRS will still not take into consideration any agreement or state law limitation on a PR’s authority. As a result, partnerships should carefully consider who exactly will be the PR.
The final regulations also clarify that a PR may engage a person to act on behalf of the PR under a power of attorney, and that such an engagement does not designate the person on the power of attorney as the PR.
Finally, the regulations also finalized the proposed and temporary regulations issued in 2016 regarding the early election into the BBA audit regime under Treas. Reg. Sec. 301.9100-22 with no changes.
Managing Director, Washington National Tax Office
+1 202 521 1513
Principal, Partnerships, Washington National Tax Office
+1 202 521 1590
Senior Manager, Washington National Tax Office
+1 202 521 1511
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