Business and International Tax Blog

On August 6, final regulations under Section 6223 were issued in T.D. 8939 and are effective for partnership taxable years commencing after 2017. When the centralized partnership audit rules were Enacted into law on November 2, 2015 as part of the Bipartisan Budget Act of 2015 (BBA), the new law made profound changes to the partnership audit rules.

One of the more profound  significant reforms was the removal of the “tax matters partner” provision under the prior version of the unified partnership audit rules,that were enacted in 1982 as part of the Tax Equity and Fiscal Responsibility Act (TEFRA) and its replacement by the BBA with the “partnership representative” rule. In section 6223(a), the law requires that each partnership designate, in the manner provided by the IRS in regulations or other guidance, “a partner (or other person)” having a “substantial presence in the United States” as the partnership representative. The statute further provides that the partnership representative has the “sole authority” to act on behalf of the partnership. That was clearly not the case under the Tax Equity And Fiscal Responsibility Act Of 1982  the TEFRA) entity level audit rules, where “notice partners”, in addition to the tax matters partner, enjoyed rights to receive audit information and participate in the audit, appeal or litigation involving proposed adjustments made by the IRS to informational returns previously filed and under audit. Section 6223(b) next tells us that “a partnership and all partners of such partnership shall be bound by actions under this subchapter (BBA) by the partnership, and by any final decision in a proceeding brought under this subchapter with respect to the partnership”.

Did they really mean that? Unfortunately, they did.Why?  The former Commissioner of the IRS had testified before the tax-writing committees of Congress that the IRS lacked appropriate resources to effectively audit partnerships. In fact, the audit rate was quite low (i.e., .08 percent), and there frequently were off-setting adjustments which resulted in not producing much revenue to the government.. Congress listened in enacting the BBA and the fulcrum for opening and closing audits, or settling tax disputes over partnership items, was for the government to only have to deal with one person, the new rule requiring the annual designation of a “partnership representative”. Moreover, unlike the tax matters partner provision under TEFRA’s entity level audit rule, the partnership representative does not have to be a partner. It could be an accountant, lawyer, business advisor or other individual provided that such person had a “substantial presence” in the U.S.

The following post is taken in part from an article authored by Jerry. August which article was recently published by the Practising Law Institute, New York, NY as part of its symposium on Tax Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures and Other Strategic Alliances (2017/2018)

The following items highlight several of the important revisions to the new partnership audit rules that have either been enacted into law by Congress in amending the BBA through the technical corrections legislation passed in March, 2018 or under the final regulations under the electing out provision. Special attention should be given to the new pull-in modification procedure as well as the special assessment and collection provisions contained in new Section 6232(f). Proposed regulations have also been issued on tax attributes and basis adjustments as well on the application of the BBA to the international withholding rules. Final regulations are promised to be issued in the near future on the partnership representative provision. It is anticipated that the regulations projects will be completed sometime in the Fall which would presumably include proposed and temporary regulations on the recent technical corrections made to the BBA.