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COLUMNS I Tax Practice & Procedure

Has the New Partnership Representative Been

Granted Too Much Power?

By Kevin M. Flynn

n November 2, 2015, Congress enacted the Bipartisan The BBA Audit Rules
Budget Act of 2015 (BBA), which contained sweep- The BBA enacted default audit rules that apply to all part-
Oing changes to the Internal Revenue Code’s (IRC) nership income tax returns filed by entities taxed as a partner-
partnership audit, litigation, assessment, and collection proce- ship beginning January 1, 2018. The defining feature of the
dures. The BBA repealed the partnership audit and litigation default rules is to establish a centralized partnership audit
rules enacted as part of the Tax Equity and Fiscal regime that, in general, provides for the assessment and col-
Responsibility Act of 1982 (TEFRA), which had governed the lection of tax, including penalties and interest, exclusively at
practice of tax advisors and the IRS for more than three the partnership level. The scope of the adjustments determined
decades. The BBA also replaced TEFRA’s partnership “tax at the partnership level is broad; it includes any items of
matters partner” with a new “partnership representative,” in income, gain, loss, deduction, or credit relating to a partner-
whom it vested vast powers, including the sole authority to ship’s tax return [IRC section 6221(a)]. As such, the BBA
act on behalf of a partnership and to bind all partners on part- audit rules did away with such terms as “partnership items,”
nership matters covered by the BBA. In light of these expanded “affected items,” and “computational adjustments,” which
powers, partners must carefully consider the person that they caused litigation under the TEFRA regime.
select to be the partnership representative. The failure to do The BBA audit rules further provide that any underpayment
so could be financially calamitous. in tax, penalties, and interest determined will be assessed and
collected against the partnership
in the year that the audit or liti-
gation is concluded (absent what
is defined as a “push-out” elec-
tion), rather than the actual tax
year of the partnership that is
under examination. This could
result in current partners shoul-
dering the financial burden for
tax liabilities attributable to tax
years for which they were not
even partners in the partnership.
The tax due will be assessed at
the highest federal marginal rate
for individuals and corporations
for the year under audit [IRC
section 6225(b)(1)].
A partnership can ameliorate
the harshness of taxation at the
highest marginal rate under IRC
section 6225 in three ways. First,
the amount of tax assessed
against the partnership can be
reduced if one or more partners

64 SEPTEMBER 2018 / THE CPA JOURNAL