The new rules for partnership audits enacted by the Bipartisan Budget Act of 2015 ("BBA") will dramatically impact not only how tax adjustments are assessed, but who is responsible for them. These rules will go in effect for partnership tax years beginning after December 31, 2017. We advise you to discuss with your legal counsel, so that your agreements include the new elections and address the updated regulations summarized below.
The BBA does away with the Tax Matters Partner and introduces an entirely new role: the Partnership Representative ("PR"). The IRS will communicate exclusively with the PR, who has sole authority to unilaterally bind all partners in proceedings for purposes of tax law. At a minimum, the partnership agreement should address a process for selecting, removing, and replacing the PR. The partnership agreement should provide guidance for the exercise of the PR's broad statutory authority. The PR does not have to be a partner of the partnership, but if the representative is not specifically stated in the agreement, the IRS has the authority to select any person to serve in that role. The PR is designated annually on the partnership return and cannot be changed until an IRS notice of administrative proceedings is received or when the partnership files a valid administrative adjustment request ("AAR"). Please be cognizant of the above-mentioned rules before selecting the PR for your partnership.
There is an ability for Partnerships to elect out of the new rules under BBA. This is only available to certain Partnership types. Absent an election out, all audit adjustments will now be made at the partnership level in the year of adjustment rather than the year being audited (reviewed year). The IRS will only notify the partnership and its partnership representative of any audit or proposed adjustments. A “push-out” election, an option to transfer the liability related to the adjustment back to those partners who received the economic benefit in the audited (reviewed) year, can be made by the partnership within 45 days of the notice of final partnership adjustment. The "push-out" election is not automatic or self-executing. Partnership agreements should address the elections available to set good expectations for those both entering and/or leaving the partnership.
Although further guidance from the IRS is to be expected, many of these issues and risks can be addressed and mitigated by proactively reviewing and, where appropriate, amending your partnership and operating agreements to anticipate and address the change. Please contact us if you have any questions.