How a BBA Partnership Representative Can Ruin Your IRS Audit

Congress enacted the Bipartisan Budget Act (BBA) in 2015 to repeal the partnership audit provisions of the Tax Equity and Fiscal Responsibility Act of 1982. A major update involves the person who defends the partnership during an audit. That person used to be called the Tax Matters Partner (TMP) under the old regime; now, that person is the Partnership Representative (PR). The TMP had a similar function - acting as the liaison between the partnership and the IRS during audits - but the TMP's authority was limited. For example, the partners could restrict the TMP's ability to settle disputes with the IRS. Partners could also challenge the results individually, leading to reduced collections and hampering IRS enforcement efforts.

Not so under BBA. The PR holds exclusive authority to bind the partnership and all partners, who have no statutory right of intervention. That concentration of power was meant to simplify audits and tax collection, and it has - for the IRS. For example, IRS auditors no longer look to state law to determine the TMP’s authority to bind the partnership to audit adjustments. The IRS can enter binding agreements directly with a PR. Moreover, IRS collectors no longer need to wait out challenges from individual partners. And while such reforms are helpful for the government addressing the tax gap, they created an opportunity for things to go sideways.

One way that PRs can undermine a partnership is to withhold notice of administrative proceedings - one of the few opportunities a partnership can revoke the PR’s designation. Partnerships assign a PR to a tax year when the return is filed, who remains the PR for that tax year until resignation or revocation. At the beginning of an audit, the IRS is supposed to notify both the partnership and the partnership representative under Section 6231. But that dual notice is a misnomer. In practice, the IRS considers notice to the PR sufficient for establishing notice to the partnership.

Buyers of BBA partnerships can inherit millions in hidden liabilities when a PR keeps quiet. The PR may agree to adjustments or settlements with the IRS that help the sellers. The PR might also fail to push out unfavorable adjustments, leaving buyers with new liabilities. Since BBA gives PRs the sole authority to bind the partnership and the former partners in IRS audits, the PR’s silence could be costly.

Sometimes the damage comes from bad faith; other times, from delay. PRs commonly wait to push out imputed underpayments until the night before the deadline. To make their election effective, the PR must electronically file Form 8988 within 45 days the Final Partnership Adjustment was mailed by the IRS. What many find out too late is that it may take up to three days to gain access even if the PR had access to the EFIN program already. As it stands, postmarked or faxed push-out elections do not count. What then? Fax it anyway and gamble that the court finds the push-out election was valid?

And although its push for e-filing all returns is a step forward, the IRS has also created needless complexity that distracts from the regime. One signature on a government form, for instance, can wipe out a partnership’s rights to appeal or litigate. The IRS will mail the Final Partnership Adjustment after the audit and ask the partnership representative to sign Form 15027 and agree to the adjustments. By signing, the PR may eliminate the partnership’s ability to contest the adjustments with IRS appeals, to contest the adjustments in court, and prohibit pushing those adjustments out to the partners. This author is unaware of any reason for a PR to sign Form 15027 - a form that epitomizes the procedural complexity of the centralized partnership audit regime.

BBA made it easier for the IRS to collect from large, complicated partnership structures. It did so by turning audited partnerships into taxable entities, which left a minefield of unsettled tax procedures. Until courts resolve the details, partnerships should take care to select a competent and diligent representative.

If you have any questions on this or any other tax issue, please call me at 214-749-2459 or email me at npegelow@meadowscollier.com.