Tax and benefit services

Partnership Representative Specialists

About
As soon as the Bipartisan Budget Act of 2015 was passed, attorneys at McDonald Hopkins began to hear concern from clients and contacts about the amount of responsibility that falls on a partnership representative. As the January 2018 effective date began to draw closer, the concern and number of questions grew. In response to all of this, we decided to form Partnership Representative Specialists to provide clients with a safe, reliable option for their partnership representative. Our goal is to alleviate the burden from any one particular partner at your business and give you peace of mind knowing experienced tax attorneys and attorneys who are also certified public accounts are handling your partnership representative duties.
 
Why use Partnership Representative Specialists as your partnership representative?
  • We will track IRS correspondence and the notice requirements of your Partnership/Operating Agreement using a formalized, database-driven system of tracking IRS notices, determining notice and consent requirements, and notifying partners and (where required) obtaining appropriate consents to certain decisions.
  • Partnership Representative Specialists has the ability to utilize the resources of McDonald Hopkins attorneys (and CPA/attorneys who are CPAs) who have decades of experience in partnership taxation and in dealing with the IRS in controversy and audit work.
  • The cost to delegate responsibilities to Partnership Representative Specialists involves an initial set-up fee and a modest annul fee.
  • The regulations require that each partnership representative that is an entity (such as a corporation or LLC) designate a person to serve as the primary contact with the IRS. With Partnership Representative Specialists, this person (your “Partnership Representative Designee”) will be one of our tax partners, each of whom has Big Four accounting firm experience and over 20 years experience as a tax lawyer specializing in partnership matters.
  • Each Partnership Representative Designee has vast experience drafting and interpreting the terms of Partnership Agreements and Operating Agreements.
  • As a client of Partnership Representative Specialists, you will receive a discount on legal fees in the event that you use McDonald Hopkins to handle aspects of an audit.
  • Your engagement letter makes it clear that if you request to change your partnership representative, we will cooperate in every way.
 
Attorneys

Attorneys

Michelle Rood profile image

Michelle Rood

David D. Ebersole profile image

David D. Ebersole

David M. Kall profile image

David M. Kall

FAQs
  1. Do I need a partnership representative?
  2. Our partnership has a tax matters partner, isn't that enough?
  3. What does a partnership representative have to do?
  4. If I serve as a partnership representative, how often do I need to update my partners on the status of an audit? When do I need to consult with them about decisions relating to the audit?
  5. Does a partnership representative have to be a partner in the partnership?
  6. Does the partnership representative have to be one person?
  7. Why would someone hire a non-partner to serve as partnership representative?
  8. How is the partnership representative designated?
  9. What if I haven’t amended my partnership agreement yet to address the issues raised by the BBA?
  10. Why is Partnership Representative Specialists a good choice for my partnership representative?
  11. If I hire Partnership Representative Specialists, can I change the partnership representative down the road?
  12. What is the fee for using Partnership Representative Specialists as our partnership representative? 
  13. What exactly will Partnership Representative Specialists do for the initial fee?
  14. What exactly will Partnership Representative Specialists do for the annual fee?
  15. Does this mean that I have to pay Partnership Representative Specialists to handle the audit?

  1. Do I need a partnership representative?

    Yes. Every partnership and LLC needs a partnership representative. Although there was some uncertainty as to whether partnerships opting out of the new audit rules would need to have a partnership representative, regulations issued in February 2017 make it clear that every partnership, regardless of whether it opts out of the audit rules, needs to appoint a partnership representative. Although these regulations have at this point been withdrawn, they clearly show the intent of the IRS as it relates to these rules. The regulations will almost certainly be issued in substantially the same form.
  2. Our partnership has a tax matters partner, isn't that enough?

    No. The BBA eliminates the concept of a tax matters partner; these provisions in your partnership/operating agreement have no effect. This is the most common reason we advise clients to amend their partnership agreement regardless of whether they wish to opt out of the other provisions of the BBA.
  3. What does a partnership representative have to do?

    The role of the partnership representative per the new IRS rules is to “have the sole authority to act on behalf of the partnership…” Since the IRS does not require the partnership representative to give notice to the partners or seek their consent on decisions such as settlements with the IRS, partnerships will likely impose additional duties on the partnership representative through provisions in their partnership/operating agreements.
  4. If I serve as a partnership representative, how often do I need to update my partners on the status of an audit? When do I need to consult with them about decisions relating to the audit?

    The BBA statute and regulations provide no specific guidance on this. The only guidance is that, as far as the IRS is concerned, the partnership representative has sole authority to make these decisions with no obligation to consult with or even notify the partners. Because of this, most operating agreements will likely require the partnership representative to update partners on the status of an audit and consult with them about any decisions. It’s unfortunately open to interpretation for the partnership representative to determine  what an operating agreement means when it states that the partnership representative will notify the partners of “significant” events or seek confirmation for “important” decisions.
  5. Does a partnership representative have to be a partner in the partnership?

    No. The new rules are clear that the partnership representative does NOT need to be a partner. (Under prior rules, a tax matters partner had to be a partner in the partnership.)  This change is likely because of the greater level of responsibility of the partnership representative and the fact that many partners are not comfortable filling this role.
  6. Does the partnership representative have to be one person?

    No. The audit rules specifically provide that an entity (such as an LLC or corporation) can be appointed as the partnership representative. An individual does, however need to be designated to be the “point person” with the IRS.
  7. Why would someone hire a non-partner to serve as partnership representative?

    A partner could have a conflict of interest acting as the sole point of contact with the IRS. For example, as part of an audit a partner could be asked to settle matters that will be financially adverse to their other partners.Someone with experience dealing with the IRS and audit proceedings may also find it easier deciding what is significant enough for an update.
  8. How is the partnership representative designated?

    The partnership representative is designated EACH YEAR in the partnership’s tax return for the year of the designation.
  9. What if I haven’t amended my partnership agreement yet to address the issues raised by the BBA?

    McDonald Hopkins LLC has a program designed to advise partnerships on their options and draft the necessary amendment for a fixed fee.
  10. Why is Partnership Representative Specialists a good choice for my partnership representative?

    Database. Notification information will be maintained in a database, similar to the database we use for other areas of law. This eliminates the possibility of your partners not being appropriately notified of an audit, or the progress or resolution of an audit.

    Expertise. Our attorneys have many years experience in dealing with the IRS both as tax attorneys and as certified public accountants. They understand how the audit process works and will help resolve issues quickly and efficiently.
  11. If I hire Partnership Representative Specialists, can I change the partnership representative down the road?

    Your ability to change your partnership representative would be limited only by the terms of your agreement with your partners and the IRS rules. If the requisite consent of the partners is obtained to a change, you are able to terminate the partnership representative at any time for years going forward. IRS regulations only permit changing a partnership representative for a past year once the IRS issues a notice of administrative proceeding  or the partnership files an administrative adjustment request. This request CANNOT be used solely to change the partnership representative.

    If you select Partnership Representative Specialists as your partnership representative, we cannot voluntarily resign, so fees must accrue until we can resign. Our engagement letter will make it clear what must be submitted (i.e., certified copy of resolutions of the partners) in order for us to terminate our engagement. This protects the partnership from one partner acting to do so without authority.
  12. What is the fee for using Partnership Representative Specialists as our partnership representative?

    The initial set-up fee is for the service is $550. After the initial fee, an annual fee of $150 applies. Fees will not be charged until January 1, 2018, when the BBA rules come into effect.
  13. What exactly will Partnership Representative Specialists do for the initial fee?

    We will review the portions of your partnership agreement outlining the duties of the partnership representative, and the provisions relating to approval of matters such as audit settlement. We will maintain this information, along with the names and contact information of each partners required to receive notice of specific IRS matters. We will also deliver an engagement letter specifying for instance, what events will require notification and/or partner action such as a vote.
  14. What exactly will Partnership Representative Specialists do for the annual fee?

    If Partnership Representative Specialists receives any notice from the IRS, we will notify the partners as required of the audit commencement and provide the required information. We will send an outline of the requirements for notice and approval, and will serve as the point of contact between the IRS, the partners in the partnership, and the accounting or law firm handling the audit.
  15. Does this mean that I have to pay Partnership Representative Specialists to handle the audit?

    No. Once the audit commences, you can use any accounting or legal firm or advisor to handle the actual audit, just as you would if a partner were the partnership representative. To the extent that you would like us to be involved in the audit process or in any post-audit controversy work, you would be billed at a rate which reflects a 15 percent discount for all work done by any McDonald Hopkins attorneys relating to the audit and/or appeals or Tax Court Proceedings.
 
Bipartisan Budget Act of 2015
The Bipartisan Budget Act of 2015 (BBA) enacted sweeping changes (referred to generally as the audit rules) to how partnerships (including all limited liability companies that have not elected to be taxed as a corporation) will be audited by the IRS. One of the most significant changes is that beginning in 2018, every partnership and LLC taxed as a partnership will need to appoint a partnership representative who will have sole authority to interact with the IRS, including the authority to settle audits and tax controversies. If a partnership does not appoint a partnership representative, the IRS has the authority to appoint one for the partnership – and there is no requirement that the partnership representative appointed be a partner in the partnership.

Elimination of the tax matters partner

In the past, partners (and LLC members) usually gave little thought as to who would serve as the tax matters partner (tTMP). The TMP was only relevant in certain partnership audit proceedings, and individual partners generally had the right to receive notice of and participate in these proceedings.

And since the authority of the TMP is limited under current law, attorneys rarely have lengthy discussions about the ramifications of naming a TMP. Under the new Audit Rules, Internal Revenue Code Section 6223 provides that the role of the TMP is completely eliminated and replaced by a partnership representative.
Partnership representative authority & obligations

Authority

A partnership representative has complete authority to act on behalf of the partnership (and therefore effectively the partners) when dealing with the IRS. This authority includes:

  • The ability to bind the partnership and the partners in audits and other proceedings, including settlement authority and decisions on procedural issues such as extending a statute of limitations.
  • Making certain elections provided for in the audit rules, including the elections whether to “push out” the tax liability resulting from an audit to the partners of the partnership in the year under audit.
  • Deciding whether to proceed to litigation.


Significantly, there is no legal obligation under the audit rules for the partnership representative to keep partners updated on the status of the audit or even to notify the partners of the audit in the first place. The partnership representative does not even need to be a partner in the partnership – which can raise an issue if a partner named as partnership representative in a partnership or operating agreement eventually leaves the partnership. Finally, if the partnership does not appoint a partnership fepresentative, the IRS has the authority to appoint one for the partnership. This IRS appointment cannot be revoked by the partnership without the consent of the IRS. This change in the role of the former TMP is significant and is an issue that every partnership agreement and operating agreement needs to address.

Obligations

Because a partnership representative has quite a bit of authority, you might assume that the audit rules would require them to notify the other partners of important developments (such as the commencement of an audit). Or, you might think they have to obtain their consent to extend a statute of limitations, agree to information requests issued by the IRS or most importantly, settle an audit, whether at the audit level, or at appeals or even tax court.

Surprisingly, the Bipartisan Budget Act provisions impose none of these obligations.

While the IRS rules impose no duties on the partnership representative as far as requirements to notify partners of audit proceedings or seek consent to settlements, most partnerships will impose some level of duty on the partnership representative by adding provisions to the Partnership/Operating Agreements. (Our general recommendation has been, at a minimum, to require the partnership representative to notify partners of the progress of the audit and seek consent for any settlement decisions.) The types and level of duties of the partnership representative will therefore vary from one LLC to the next, since there is no standard provision.

Even if the Operating Agreement imposes no specific duty on the partnership representative, it is not clear whether a failure to notify the other partners of an audit or make a decision to settle with the IRS without consent would breach a state law fiduciary duty of the partnership representative, in his or her capacity as a partner of the partnership, not as the partnership representative. These duties, be they explicit or implicit, have lead many partners to consider whether they want to take on the responsibility of serving as a partnership representative.

Third Party Partnership Representatives

The new audit rules specifically allow partnerships to use a partnership representative who is not a partner in the partnership. In fact, if a partnership does not designate a partnership representative the IRS “may select any person as the partnership representative.”

At least part of the reason for allowing a non-partner to serve as the partnership representative is that the role of partnership representative will come with a great deal of responsibility, more than any one partner may want to undertake. In addition, some partners are concerned about liability for failure to meet the requirements of serving as partnership representative or of not following the provisions of the partnership or operating agreement as it relates to exactly what the partnership representative must do in the event of an audit. Finally, partnership taxation is one of the most complicated areas of federal income taxation. While there is no requirement under the audit rules that a partnership representative have any background in accounting or taxation, making decisions on behalf of the partnership in this area (even with the guidance of a legal or accounting professional) may require the partnership representative to make a judgment call based on these complex tax rules.

In discussing the implementation of the new audit rules, one common concern is the potential for liability on the partnership representative. This liability would likely NOT arise out of a bad audit result, in most cases the person serving as Partnership Representative would use the partnership’s legal and accounting professionals in handling the actual audit. The concern is more in providing appropriate notice to the partners and in obtaining the appropriate partnership consents to decisions such as: whether to contest the result of the audit, liability also might arise in the case of failure to appropriately communicate with the partnership's professionals in how the audit is handled.

Using a third party Partnership Representative also avoids issues regarding terminating and replacing the Partnership Representative. Under the proposed Regulations, terminating a Partnership Representative can be difficult. The Regulations provide that the Partnership Representative must formally resign, and can only do so under certain circumstances. The Regulations also address situations where the Partnership Representative refuses to resign (a situation that would likely be caused be cause the Partnership Representative has a conflict of interest as a partner in the partnership in the way the audit is handled. A third party Partnership Representative (per its engagement letter) will not resist a termination of the engagement.

 

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