Tax Alert – U.S.

Partnership Alert

Partnerships filing U.S. income tax returns face two new choices on their 2018 Form 1065, U.S. Return of Partnership Income:

• Whether to elect out of the new centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA), which allows the IRS to conduct an audit at the partnership level (rather than the partner level); and
• Who to designate as partnership representative under the BBA.

Electing out

IRC (Internal Revenue Code) Section 6221(b) allows certain small partnerships to elect out of the BBA on a timely filed partnership return (including extensions) for the taxable year to which the election applies. A partnership electing out of the BBA must disclose to the Internal Revenue Service (IRS) the name and tax identification number of each partner and it must notify its partners that it made the election out of the BBA within 30 days of making the election.

A partnership is eligible to elect out of the BBA if both of the following apply:

1. All of the partners are individuals, C corporations (including a foreign entity that would be treated as a C corporation if domestic), S corporations, or the estate of a deceased partner. Partnerships with partners that are disregarded entities are not eligible to elect out of the BBA.
2. The partnership is required to file 100 or fewer Schedule K-1s.

If a partnership that elects out of the BBA (non-BBA partnership) is audited, each partner of the non-BBA partnership potentially is subject to a separate audit with respect to partnership-related items. The consequences of separate partner audits could include the following:

• Each partner could receive its own deficiency notice and have to go to court to challenge the adjustments.
• The non-BBA partnership could be required to respond to multiple information requests for each partner under audit from different agents in different locations at different times.
• Each partner under audit could face different tax outcomes.

Partnership Representative (PR)

IRC Section 6223(a) requires all partnerships that do not elect out of the BBA to designate a PR. If the partnership does not designate a PR, the IRS may designate one. A partnership is required to designate a PR on its return for each taxable year.

The PR may be any person, including an entity, so long as the PR has a substantial presence in the U.S.

Under the regulations, a PR has a substantial presence in the U.S. if the PR:

• Has a U.S. taxpayer identification number
• Has a U.S. street address
• Has a U.S. phone number
• Is available to meet with the IRS at a reasonable time and place

If a partnership designates an entity as a PR, it also must appoint a designated individual (DI) to act for the PR. The DI must have a substantial presence in the U.S. and the DI’s appointment terminates when the PR designation terminates. IRC Section 6223(b) provides that a partnership and all of the partners are bound by the actions of the PR for purposes of the BBA. Actions include, but are not limited to, extensions of periods of limitation, the decision between paying the tax and having the partners pay the tax, and settlements. Because the PR has broad authority to act on behalf of the partnership, partnerships should take care when selecting a PR. Considerations when a PR include:

• Should the PR be a partner? If not, should the PR perform other roles for the partnership, or should it perform only the role of PR?
• Do some or all of the PR’s actions require approval by the partnership?
• What are the roles and responsibilities of the PR?
• Should the partnership or limited liability company (LLC) agreement be modified to reflect the PR’s role?