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In 2017 and prior years, there existed the Tax Matters Partner. Starting in 2018, there’s a new sheriff in town referred to as the Partnership Representative (PR). The PR designation is very important because they will be the primary contact between the Internal Revenue Service (IRS) and the partnership. The IRS will deem that the PR alone has full authority to bind the partnership and partners during an IRS audit. On Form 1065, the PR chooses whether to elect out of the centralized partnership audit regime. What exactly does this mean?
Selecting “yes” means any audit adjustment in that year will be pushed down to the partners that existed during the year being audited. The partners are then required to amend their personal returns for their share of the audit adjustment. This option is only available if the partnership has 100 or fewer eligible partners. Eligible partners are individuals, C corporations, S corporations, an estate of a deceased partner and certain foreign entities taxed as corporations. Partnerships with partners who are limited liability companies (LLCs), including single member LLCs, trusts (including grantor trusts) are not eligible to elect out.
Selecting “no” means the partnership will pay the tax resulting from an IRS audit, which is what the IRS prefers. The good news with a “no” answer is that the PR has the option to change their mind later. To do this, the designated PR in the year being audited must make this election no later than 45 days after the date of the notice of final partnership adjustment (generally the date the audit is completed).
Partnerships that have frequent ownership changes may initially want to elect out because they don’t want new partners to be liable for audit adjustments for previous partners. However, the partners will be required to amend their personal tax returns. If the audit adjustment is very small, it may be less costly and more efficient for the partnership to simply pay the tax assessment on behalf of all partners. A partnership that elects out must notify each partner of the election within 30 days.
Imagine a scenario where a PR is designated on a 2018 return and in a subsequent year that person has become an adversary (and no longer a partner) to the later partnership group. That expelled partner will have no motivation to elect to push out the audit adjustments for 2018 and thus to himself. The regulations do provide for a PR’s resignation and revocation of the PR’s designation.
It is extremely important for all partnerships to consult with their attorney to make sure their partnership agreements address these new rules. All partnerships need to inform their CPAs about the PR designation. CPAs cannot assume that the Tax Matters Partner in 2017 is now the PR for 2018 and future years.
For more information or assistance with establishing a PR, contact Doeren Mayhew’s tax advisors today.
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