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Thoughts and Consideration Regarding the Designation of a Partnership Representative

By Joel N. Crouch on January 23, 2019

In November 2015, as part of the Bipartisan Budget Act (BBA) of 2015, Congress enacted a new centralized partnership audit regime to replace the TEFRA partnership rules. The new centralized partnership audit regime is generally effective for partnership tax years beginning after December 31, 2017.  As a result, the 2018 tax returns for most  partnerships will be the first tax return filed under the new regime.   One of the first questions partnerships, partners and tax professionals will face is determining who will be the Partnership Representative (PR).  Although this would seem to be a simple question to answer, as explained below, it is much more involved than selecting a Tax Matters Partner (TMP) under the old TEFRA regime.  This is especially true because any tax liability resulting from an IRS audit under the new centralized partnership audit regime is to be paid by the partnership in the current year, unless the PR takes affirmative steps otherwise.  Failure by the PR to take action on a timely basis could result in a mismatch of tax burdens and tax benefits between current and former partners in a partnership.   

If a partnership is not eligible to opt out of the new partnership audit regime or decides not to do so, a PR must be designated on the Form 1065 each year.  For 2018, the PR is designated on Schedule B of Form 1065.  A PR must be designated each year by the partnership and there is no requirement that it be the same representative each year.  The designation is effective until the PR resigns, the partnership revokes the designation or the IRS determines the designation is invalid. 

There can be only one PR each year and the PR has the sole authority to act on behalf of the partnership for purposes of the IRS examination and subsequent proceedings. No other partner or any other person may participate in a partnership examination or other proceeding involving the partnership without IRS permission.  By the designation, the PR has authority to bind the partnership and all partners or any other person whose tax liability is determined in whole or in part by adjustments determined by final resolution of an IRS examination, appeal or judicial decision.  This is very different from TEFRA, where partners had a right to participate and the TMP had notification and other duties to the partners.     

Unlike the TMP in TEFRA, the new PR need not be a partner.  The PR can be any person or even an entity if the person or entity meets the requirements in the regulations.  If the PR is an entity, there must be a Designated Individual (DI) appointed to act on behalf of the PR. Pursuant to the regulations, a PR must have a “Substantial Presence” in the United States.  “Substantial Presence” means the PR (1) is available to meet in person with the IRS in the U.S., (2) can meet at a reasonable time and place determined by the IRS under Reg. 301.7605-1, (3) has a U.S. street address and U.S. telephone number, and (4) has a U.S. taxpayer ID number. 

A partnership may revoke a representative designation and designate a new PR by filing an Administrative Adjustment Request (AAR) or by completing and filing the newly released Form 8979, “Partnership Representative Revocation, Designation, and Resignation”.   The AAR must be filed before the IRS sends a Notice of Administrative Proceeding  (NAP) and cannot be filed solely to revoke the PR designation.  A Form 8879 can only be filed after the IRS sends a NAP.   A PR can file a Form 8979 resigning as the PR only after the IRS sends a NAP.  The partnership has 30 days after the PR resigns to designate a new PR.  If the partnership fails to properly designate a new PR, the IRS can do so on behalf of the partnership.    However, actions taken by a PR prior to termination or resignation remain valid.

Because the PR has the sole authority to act on behalf of the partnership and can bind the partnership and all partners, careful consideration must be made regarding what person or entity should be the PR.  A few of the issues to be considered are:

  1. Should the PR be a partner?
  2. Partner's right to notice regarding an IRS examination and subsequent proceedings.
  3. Partner participation in an IRS examination.
  4. Partner participation in critical decisions. By vote? Which group of partners, the current or former?
  5. Procedures and authority for determining the PR and revoking the PR designation.
  6. PR authority and power.
  7. To whom does the PR owe a duty, the current or former partners?
  8. Indemnification of PR by partnership and partners.

Finally, it is important to recognize that the IRS is not bound by a partnership agreement or other agreement that limits the authority and power of the PR. By way of simple example, if the partnership agreement states that the PR cannot extend the statute of limitations without authorization and the PR does so without proper authorization, the extension is valid.  A partner’s recourse is limited  to an action against the PR for violating the agreement.

For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.