On Aug. 7, the IRS finalized proposed regulations under Sec. 6223 (REG-136118-15) on the procedures for designating a partnership representative and the authority of the partnership representative under the centralized partnership audit regime (T.D. 9839). The regulations also finalized proposed regulations (REG-105005-16) regarding the time, form, and manner for making the election to apply the regime to partnership tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018, and removed the temporary regulations on which the proposed regulations were based.
The centralized partnership audit regime, which generally assesses and collects tax at the partnership level, was enacted by the Bipartisan Budget Act of 2015, P.L. 114-74.
The IRS received comments on the proposed regulations regarding a broad range of topics involving the designation and authority of the partnership representative under Sec. 6223. These topics included:
- The eligibility to serve as a partnership representative;
- Designating or changing a partnership representative or a designated individual;
- The IRS designation of a partnership representative; and
- The binding effect and authority of the partnership representative.
After considering the comments, the IRS made substantive revisions to the regulations under all of these topics.
One suggestion from commenters was that a disregarded entity should be able to serve as a partnership representative. The IRS decided that one could, but it has to meet the same rules as when other entities serve as partnership representatives — the partnership is required to appoint a designated individual to act on behalf of the disregarded entity under Regs. Sec. 301.6223-1(b)(3) and both the disregarded entity and the designated individual must have a substantial presence in the United States under Regs. Sec. 301.6223-1(b)(2).
The final rules also permit the partnership to designate itself as its representative if it believes it is the most appropriate person to serve in that capacity. In that case, it must designate an individual to act on its behalf, and both it and the individual must have a substantial presence in the United States.
Another change from the proposed regulations is that, in response to comments, the IRS removed the requirement that a partnership representative have the capacity to act on the partnership's behalf. The IRS believes that partnerships are in the best position to determine whether a representative has the capacity to act on their behalf.
The IRS received a number of comments on the timing of the power to change the partnership representative, most of which the Service rejected as being too burdensome, but it did revise the regulations to permit a partnership to revoke a representative's designation after it received a notice that the partnership had been selected for audit. It also revised the regulations to remove a partnership representative's ability to resign when an administrative adjustment request has been filed, permitting it only when a notice of administrative proceeding has been issued. Further, the IRS revised the regulations to remove the ability of a resigning partnership representative or designated individual to designate his or her successor.
Another issue involves revocation of a designated partnership representative. In response to comments, the regulations were revised to provide that the revocation is effective upon receipt by the IRS and that the IRS will notify the partnership within 30 days that it has received the revocation. In the case of the revocation of a representative designated by the IRS, the revocation is effective on the date the Service sends notification that a revocation is valid.
A related issue is notification to a partnership by a resigning or revoking partnership representative and notification to a partnership representative when a partnership revokes a partnership representative designation. The proposed regulations provided specific rules for these notifications for partnership representatives and partnerships, but because state law governs the validity of these notifications, the final regulations eliminate these rules. The final regulations specify that in these situations the partnership representative and the partnership only are required to notify the IRS.
The next portion of the rules address IRS designations of partnership representatives. The final regulations retain the multiple revocation rule, under which the IRS may determine a designation is not in effect when, among other circumstances, the IRS has received multiple revocations within a 90-day period. However, the final regulations make a number of changes to the details of the rules, including adding a time limit to the rule. Under the time limit, if the IRS plans to determine a designation is not in effect due to receipt of multiple revocations, the IRS must do so within 90 days of the receipt of the current revocation the IRS is considering.
The IRS also addressed the partnership representative's authority to bind the partnership. The only change in response to a comment was removing a reference to a partnership representative in the provision discussing the finality of a notice of final partnership adjustment, because it is the partnership that contests the notice of final partnership adjustment, even if it does so through the representative.
In addition, changes to the final regulations clarify that a partnership representative may engage another person (such as a CPA) to act on its behalf during the examination using the existing power of attorney procedures and that the appointment of a POA does not designate the POA as the partnership representative.
The IRS did not receive any comments to the proposed regulations regarding the time, form, and manner for making the election to apply the regime to partnership tax years beginning after Nov. 2, 2015, and before Jan. 1, 2018. Therefore, it adopted those regulations without substantive changes and removed temporary regulations that had been issued.
The regulations were effective Aug. 9, 2018, the date they were published as final in the Federal Register.