Page 5 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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as the “electing large partnership provisions.”
Continued Applicability of the TEFRA Entity-Level Audit Rules
In general, the BBA centralized au- dit regime does not start in earnest until tax years beginning after 2017. Partnership audits, therefore, will continue to be governed by the TEFRA entity-level audit rules for all tax years that are still within the applicable period of limitations, be it the general three-year period, the six-year period for items that consti- tute greater that 25% omissions, or an unlimited period if no return is filed for a pre-BBA year or there are items of fraud on a return filed at any time prior to 2018.
Under TEFRA, there are three re- gimes for auditing partnerships. For partnerships with ten or fewer eligi- ble partners, the IRS generally ap- plies the audit procedures for indi- vidual taxpayers, auditing the partnership and each partner sepa- rately. For most large partnerships with more than ten partners, and small partnerships that are not “eli- gible small partnerships,” the Ser- vice and the partnership engage in a single administrative proceeding to resolve audit issues regarding part- nership items that are more appro- priately determined at the partner- ship level than at the partner level. Once the audit is completed and the resulting adjustments are deter- mined, the IRS must recalculate the tax liability of each partner in the partnership for the particular audit year.
Provisions to Consider for Part- nership and LLC Operating Agreements for TEFRA Partner- ships: It Still Matters
In instances where the partnership will be subject to entity-level audit
7 Reg. 301.6223(g)-1(a)(3). 8 Reg. 301.6223(g)-1(b)(i).
64D*points, Next 120D, Vjust JC1:1
procedures under TEFRA, which will apply to existing partnerships through the expiration of the statute of limitations on assessment of in- come tax with respect to audits of partnerships for tax years commenc- ing on or before December 31, 2017, it is important for the draft- sperson of the partnership agree- ment to give a fair amount of thought and consideration to what provisions need to be reflected in the agreement pertaining to the tax matters partner and the TEFRA pro- visions in general. While the BBA is receiving by far the most atten- tion by tax commentators, Treasury, and the Service, it should not be overlooked that TEFRA is still the “game” for a few more years.
As discussed below, many of the provisions that are part of a compre- hensive set of rules governing the tax matters partner can be incorpo- rated into a set of rules applicable to the partnership representative under the BBA. Since the partner- ship representative is the exclusive agent for representing the partner- ship before the IRS and can bind all partners to a settlement or set of ad- justments at audit, the set of provi- sions governing the partnership rep- resentative under the BBA are critically important and are not well served by the adoption of a short form paragraph or two to reduce document costs.
The Tax Matters Partner Provi- sion
The tax matters partner (TMP) has direct responsibility for representing the partnership in a TEFRA pro- ceeding and notifying and informing the partners of the status of the au- dit, appeal, or litigation. The Service considers the TMP the quarterback for the partnership and sends the TMP TEFRA notices and informa-
9 Regs. 301.6223(g)-1(b)(ii) - 301.6223(g)-1(b)(iv).
tion about proceedings. The title, jobs, and duties of the TMP must be identified in the partnership agree- ment.
Responsibility of the tax matters partner.
The responsibilities of the TMP are described with a broad brush in Reg. 301.6223(g)-1. The first area of responsibility is to provide notice of the commencement of an audit to each non-notice partner within 75 days after the Service mails the no- tice of audit specified in Section 6223(a)(1) to the TMP and notice partners. Similarly, the TMP is re- quired to forward, within 60 days after receiving the notice of an FPAA specified in Section 6223(a)(2)), a copy of the notice to each non-notice partner. The regula- tions provide exceptions to the no- tice requirement rule.7
The TMP must also furnish part- ners with other notices or informa- tion:
1. The TMP must inform each partner of a closing conference with the examining agent.8
2. The TMP must provide all partners with information about pro- posed adjustments, rights of appeal, the requirements for filing an ad- ministrative appeal with the IRS, and the time and place for any ap- peals conference.
3. The TMP must notify the partners of an acceptance on behalf of the partners of a settlement offer made by the Service.9
The TMP may bind partners who are not notice partners to a settle- ment with the IRS unless such part- ners file statements with the Service revoking this authority.10 The TMP also may waive the period of limita- tions for all partners.11 Further, the TMP may file an administrative ad-
10 Section 6224(c)(3).
11 Section 6229(b)(1)(B).
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