IRS Continues to Release Guidance for the New Centralized Partnership Audit Regime
The IRS continues to issue both final and proposed regulations clarifying the operation of the centralized partnership audit regime. The centralized partnership audit regime was enacted by the Bipartisan Budget Act of 2015 (“BBA”). For a general summary of the BBA and the centralized audit regime, see our prior articles on the subject (“IRS Finalizes Regulations for Opting Out of Centralized Partnership Audit Regime,” “Considerations for Modifying Partnership Agreements and LLC Operating Agreements in the Wake of the New Centralized Audit Regime” and “New Partnership Audit Rules Amended by the Consolidated Appropriations Act, 2018”).
Final Regulations Concerning the Partnership Representative
On August 9, 2018 the IRS adopted final regulations related to the selection, removal, and replacement procedures for the partnership representative. The final regulations also outline the procedures for opting into the centralized regime for tax years beginning after November 2, 2015 and before January 1, 2018.
Qualifications of the Partnership Representative
Among the final regulations is a provision allowing for a disregarded entity to be designated as the partnership representative. Furthermore, a partnership may also name itself as its own partnership representative. The regulations clarify that if any entity is named as the partnership representative, the partnership (and not that entity) must also identify a “designated individual.”
Unchanged from the proposed regulations is the requirement that the partnership representative have a substantial presence in the United States. A person is presumed to have a substantial presence in the United States if the person is able to meet in person with the IRS in the United States at a reasonable time and place, has a United States street address and telephone number where the person can be reached during normal business hours and has a United States taxpayer identification number. Even though clarification was requested on what is considered reasonable with respect to the time and place of meeting and if the “normal” business hours referred to the hours of the IRS or the partnership, such guidance was absent from the final regulations.
Eliminated from the final regulations was the "capacity to act" requirement. Under the proposed regulations, the partnership representative would have been disqualified from acting as the partnership representative based on the occurrence of certain events during the administrative proceeding, such as the person’s death, legal incapacity or other inability to act. This requirement was removed from the final regulations, in part, because the IRS considers the partnership to be in the best position to determine whether its selected representative should be removed and the IRS can rely on the “substantial presence” requirement to encompass those situations contemplated by the proposed regulations.
Designation and Removal of the Partnership Representative
The final regulations maintain that the partnership representative for a taxable year be designated on the partnership’s tax return for that year. The partnership representative may be changed at any time, provided the IRS consents. Without IRS consent, a change is only permitted prior to the commencement of administrative proceedings.
In the case of a resigning partnership representative, the IRS eliminated the provision in the proposed regulations that allowed a resigning partnership representative to name his or her successor, preferring instead to leave such responsibility with the partnership. In the case of a resignation or change in designation, the IRS must receive notice, though permission from the IRS is required for the replacement of a partnership representative previously designated by the IRS. On August 14, 2018, the IRS released a draft of a new Form 8979, Partnership Representative Revocation, Designation, and Resignation, which provides a method for partnerships to notify the IRS of the removal or replacement of partnership representatives and designated individuals.
Proposed Regulations Reflecting Technical Corrections
Also on August 14, 2018, the IRS released new proposed regulations modifying and replacing previously issued proposed regulations. The changes to the proposed regulations were due to the technical corrections made to the partnership audit rules by the Consolidated Appropriations Act, 2018 (“CAA”). Among other changes, the technical corrections altered the scope of the centralized partnership audit regime. Before the technical corrections, the centralized partnership audit regime covered “adjustment to items of income, gain, loss, deduction, or credit of a partnership and any partner’s distributive share of those adjusted items.” The CAA modified the scope to cover, more generally, any “partnership-related item.” A “partnership-related item” is now defined in the statutes to include any item or amount with respect to the partnership which is relevant in determining the tax liability of any person and any partner’s distributive share of any such item or amount.
This statutory change necessitated modifications in the proposed regulations. For example, regulations requiring consistency between the tax returns of the partnership and the partners with respect to adjustments to “income, gain, loss, deduction, or credit of a partnership and any partner’s distributive share of those adjustment items” were modified to require consistency for adjustments of “partnership-related items.” Similar changes were made to regulations concerning adjustments and modifications of imputed underpayments and the calculation of imputed underpayments.
Considerations for Partnership Agreements and Operating Agreements
The proposed and final regulations will impact almost all partnerships and limited liability companies taxed as partnerships for taxable years beginning after December 31, 2017. The continued release of new and modified regulations concerning the partnership representative highlight the importance of that role as it relates to the centralized partnership audit regime. Entities taxed as partnerships should include provisions in their partnership agreements or operating agreements that address how the partnership representative is to be appointed and replaced, causes for removal, and the scope of the partnership representative’s authority.
Further, the repeal and replacement of proposed regulations illustrates that guidance on the centralized partnership audit regime continues to be a moving target. Entities taxed as partnerships should continue to watch the release of regulations closely.