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Final BBA audit regulations address partnership representatives

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August 2018


For partnership taxable years beginning after December 31, 2017, partnership audits and the assessment and collection of related taxes will be centralized at the partnership level. Any tax assessed generally will be collected at the partnership level and borne indirectly by the persons who are partners during the year of the partnership adjustment (not the year under examination), unless the partnership uses statutory ‘push-out’ or ‘pull-in’ mechanisms to cause the adjusted partnership items to be taken into account by persons that were partners in the year under examination.

In stark contrast to the TEFRA partnership audit rules that generally have been in effect since 1982, a single individual (i.e., a partnership representative or designated individual in the case of a partnership representative that is an entity) has the exclusive authority to represent and bind partnerships and its partners in any matter involving an examination of partnership-related items or resulting partnership tax controversy. References to the partnership representative below should be read to include the designated individual, unless otherwise indicated.

Observation: Partnership-related items go beyond specific items of partnership income, gain, loss, deduction, and credit and include ‘any item or amount with respect to the partnership (without regard to whether or not such item or amount appears on the partnership’s return and including an imputed underpayment and any item or amount relating to any transaction with, basis in, or liability of, the partnership) which is relevant in determining the tax liability of any person.’ This broad scope of items subject to a centralized partnership audit heightens the importance of the role of the partnership representative.

On August 6, 2018, Treasury and the IRS issued final regulations (TD 9839) regarding the authority, designation, and replacement of the partnership representative under the centralized partnership audit regime (the Final Regulations) enacted by the Bipartisan Budget Act of 2015 (collectively with related administrative guidance and technical corrections, the BBA audit rules). The partnership representative will have a central role in future partnership audits. Every partnership subject to the BBA audit rules must have a partnership representative, for each partnership taxable year beginning after December 31, 2017, designated by the partnership or, as warranted, the IRS. The partnership representative will have the exclusive authority to represent and bind the partnership in the examination of partnership-related items and any resulting controversy (collectively, a BBA audit).

The BBA audit rules, unlike the TEFRA partnership audit rules, do not provide partners with any rights to be notified at the beginning or any other stage of a partnership audit or, without the permission of the IRS, to participate in the audit, appeal, or later judicial review. Therefore partners can be bound by the outcome of a partnership examination, based on the actions of the partnership representative, for which they have no notice or rights of participation.

The centralization of authority in the hands of a single partnership representative places a premium on identifying the appropriate person to serve as the partnership representative, understanding how and when the partnership representative can be replaced, and considering the benefits and limitations of supplementing the BBA audit regime with contractual arrangements between a partnership and the partnership representative.

The takeaway

The BBA audit rules fundamentally change the relationship of partnerships, their partners, and the IRS during a partnership audit. The partnership representative has the exclusive authority to represent and bind the partnership in all audit matters covered by the BBA. The partners have no statutory right to notice of, or participation in, any step of the partnership audit, in contrast to certain partner rights afforded under the TEFRA partnership audit rules. It is not difficult to anticipate issues arising among the partnership representative, partnerships, and partners as a future BBA audit looms.

In light of the fundamental change and the possibility of future issues, partnership representatives and partners may want to negotiate contractual guidelines to address potential areas of concern (e.g., limitations on the authority of the partnership representative; notice, participation, and/or consent rights). Any such contractual guidelines will not bind the IRS and will not prevent a partnership representative from binding a partnership even though any contractual guidelines are not followed. However, discussions between the partnership representative and partners arguably will help communicate concerns and hopefully may reduce the chance of unexpected issues.

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Julie Allen

National Tax Services Market Leader and Mergers and Acquisitions Tax Leader, PwC US

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