Page 2 - Has the New Partnership Representative Been Granted Too Much Power?

9-0118 TPP.qxp_zEssentials.temp 8/31/18 2:17 PM Page 65

file an amended return for the tax year The second alternative is the push-out fication and participation rights, both in
under audit, taking into account the allo- election. This election permits a partner- the context of the audit and in any sub-
cable share of the partnership adjust- ship to flow through partnership audit sequent litigation, that have been com-
ments, and pay the tax due [IRC section adjustments to those persons who were pletely eliminated under the BBA audit
6225(c)(2)]. Second, the proposed under- partners in the tax year under audit [IRC rules. The BBA replaces the tax matters
payment will be reduced if the partner- sections 6226(a)-(b)]. A push-out election partner with the partnership representa-
ship can demonstrate to the IRS that one must be made no later than 45 days after tive, to whom it gave broad and exclu-
or more partners are tax exempt [IRC a Notice of Final Partnership Adjustment sive powers that may ease the adminis-
section 6225(c)(3)]. Third, the underpay- (FPA), which concludes a partnership trative burdens of the IRS but will be an
ment will also be decreased if the part- audit, is mailed to the partnership [IRC unwelcome surprise to many unwary
nership can prove that a portion of the section 6226(a)(1)]. partners and tax advisors.
underpayment is subject to a lower rate Under the push-out election, the part- Unlike the tax matters partner, who
of tax, such as a capital gain or qualified nership is required to provide a written was required to be a partner in the part-
dividend income [IRC section statement to the IRS and each partner for nership, a partnership may designate any
6225(c)(4)]. the year under audit setting forth each individual or entity, even a nonpartner,
partner’s allocable share of the partner- as its partnership representative so long
Alternatives to the Default Rules ship adjustments of income, gain, loss, as the partnership representative has a
Partnerships can avoid the default rules deduction or credit, and any penalties. “substantial presence in the United
of the centralized audit regime in two The partners must report the additional States” and the “capacity to act” [pro-
ways: by “electing out” of the BBA pro-
cedures, or by making a push-out elec-
tion. Both options have their pros and
cons.
The electing-out alternative is available The most significant consequence of electing out is
to partnerships that issue no more than
100 Schedule K-1s and whose partners that the audit will be conducted and assessments will
are only individuals, C corporations, for-
eign entities that would be treated as C be made at the individual partner level.
corporations if they were domestic, S
corporations, or estates of deceased part-
ners [IRC section 6221(b)(1)(C)]. A part-
nership choosing to elect out must do so
annually on a timely filed partnership tax and penalties in the year that they posed Treasury Regulations sections
return (including extensions) for the tax- receive notice of the adjustments from 301.6223-1(b)(2)-(b)(4)]. If an entity is
able year to which the election relates the partnership. There is a cost to the selected as the partnership representative,
[IRC section 6221(b)(1)(D)(i)]. push-out election that must be consid- the partnership must also identify and
The most significant consequence ered: the underpayment rate of interest appoint a “designated individual” to act
of electing out is that the audit will charged to each of the partners is two on behalf of the entity.
be conducted and assessments will be percentage points greater than the normal A partnership representative has a sub-
made at the individual partner level, rate of interest that would apply under stantial presence in the United States if
governed by each partner’s statute of the default rules [IRC section the partnership representative is available
limitations, for the year under exam- 6226(c)(2)(C)]. to meet with the IRS in person in the
ination. The audit procedures, there- United States at a reasonable time and
fore, will be similar to the partner- The Partnership Representative place, as determined by the IRS; has a
by-partner tax deficiency examina- The liaison between a partnership and U.S. street address and telephone num-
tions that existed before TEFRA. the IRS under the TEFRA audit proce- ber; and has a U.S. tax identification
Some partnerships may find it strate- dures was the tax matters partner, who number. A partnership representative has
gically advantageous to elect out and had the authority to bind the partnership the capacity to act unless the partnership
require the IRS to conduct individual in audit and litigation matters. Individual representative is disqualified by such
partner audits. partners also possessed meaningful noti- events as death, incapacity, incarceration,

SEPTEMBER 2018 / THE CPA JOURNAL 65