Risks and opportunities for third-party partnership representatives

By Derek J. Godwin, CPA, Pittsburgh

Editor: Anthony S. Bakale, CPA

The Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, overhauled the way the IRS conducts partnership audits for tax years beginning after Dec. 31, 2017 (Regs. Sec. 301.6223-1(h)(1)).

The tax matters partner (TMP) that was established as part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), P.L. 97-248, was replaced by the new partnership representative (PR), who has much greater powers and responsibilities than the TMP had. In addition to the creation of the PR, any imputed underpayment from an IRS partnership adjustment is now paid by the partnership (Regs. Sec. 301.6225-1(a)(1)). This is a significant change from the TEFRA rules, where adjustments were paid by the individual partners. In fact, the new centralized audit regime has been described as one where the assessment and payment of tax is made at the partnership level, not the partner level. This change in the imposition of additional tax due because of audit adjustments, as well as the increased authority vested in the PR, means that due care must be exercised when choosing a PR.

Although the purpose of this discussion is not to explain all the nuances of the newly established PR, it is important to know what powers a PR has and who is eligible to serve as one.

Authority of the partnership representative

The PR "has the sole authority to act on behalf of the partnership" and can bind the partnership "for all purposes" under the new BBA rules (Regs. Sec. 301.6223-2(d)(1)), which includes all partnership-related items that determine tax liability as defined in Sec. 6241(2)(B)(i). This means that "a settlement agreement entered into by the partnership representative on behalf of the partnership, a notice of final partnership adjustment (FPA) with respect to the partnership that is not contested by the partnership, or the final decision of a court with respect to the partnership if the FPA is contested, binds all persons" (Regs. Sec. 301.6223-2(a)). In short, the PR can make elections, sign tax returns, and agree to IRS audit adjustments, and the partnership (and its partners or members) is bound by these decisions. For this reason it is important to have a trusted, knowledgeable PR who understands complex tax rules as they relate to the partnership.

Who can be designated a partnership representative?

In general, a PR must have a "substantial presence in the United States." This means the PR must be a U.S. person, with a U.S. taxpayer identification number, U.S. phone number, and an address in the United States (Regs. Sec. 301.6223-1(b)(2)(ii)). The PR must also be "available to meet in person with the IRS in the United States at a reasonable time and place as determined by the IRS" (Regs. Sec. 301.6223-1(b)(2)(i)). Oddly, a person who works overseas for a majority of time can even be the PR, provided he or she meets all the other "substantial presence" requirements (Regs. Sec. 301.6223-1(b)(4), Example 3). An entity can be chosen as the PR but, if so, a "designated individual" must also be provided. There is no requirement that the PR be a partner in the partnership, as was the case under the TEFRA rules for the TMP. This means any third party (provided they meet all requirements) can act as the PR, including, but not limited to, an outside CPA firm or attorney.

Choosing a third party as a partnership representative

When hearing that any third party can act as a PR, the first question clients often ask their tax adviser is, "Will you be my partnership representative?" This may seem to be the obvious choice, but tax professionals must make sure they understand the risks involved with this responsibility. Significant fiduciary, practical, and legal considerations exist. All facts and circumstances should be given thorough consideration before agreeing to act as a third-party PR.


The services CPA firms provide their clients have been increasing. A single firm may provide audit and assurance, tax preparation, management consulting, IT risk analysis, and other services.

Adding "partnership representative" to that list arguably runs the risk of the CPA's losing objectivity when making decisions that can affect the company in numerous ways. Example: What if an election should be made by the PR but the PR also knows the audit team plans to issue an audit opinion with a going concern emphasis-of-matter paragraph? Any fees billed as a result of the election may be uncollectible. Is the PR's judgment skewed by the potential for lost revenue, even though the election is the proper decision? Firms seeking to act as a third-party PR must be sure they are not breaching their fiduciary duty and are truly acting in the best interests of their client.

Tax practitioners must also think of the wide array of powers that a PR has and how decisions made by the PR affect the whole partnership and all partners. A PR may make a Sec. 754 election for a new partner, and by billing the partnership for those services rendered related to making the election, other partners may feel slighted that they are paying for a service that they receive no benefit from. Although this arrangement is exactly the same as before the BBA rules, by making this election, the third-party PR may be open to accusations of "self-dealing," meaning the third-party PR chose to make an election that would require the partnership to pay the PR additional fees. Even worse, if after the Sec. 754 study, it is determined the election should not be made, the PR may be exposed to lawsuits from unhappy members (e.g., minority interest holders) of the partnership.

Proper care should be exercised by a third-party PR to ensure a general partner or limited liability company member-manager approves of those elections, and the partnership operating agreement should be updated to reflect the PR's powers. It is important to note the authority of the PR to bind the partnership is absolute. A failure of the PR to follow any state law, provision of the operating agreement, or any other legal agreement "has no effect on the authority of the partnership representative or the designated individual" acting on behalf of the PR (Regs. Sec. 301.6223-2(d)(1)). A partnership's remedy is to limit the authority of a PR via contractual arrangement and seek damages from the PR for any breach of the contract if the agreement is not followed. Whatever action a valid PR took is still binding with the IRS upon the partnership.

Significant legal risks exist when acting as a third-party PR. State statutes governing partnerships are growing in complexity, and tax practitioners should not purport to be experts in this field if they are not. Expert legal advice should be sought for all states the firm practices in, as rules can vary from state to state. Additionally, those considering acting as a third-party PR should contact their malpractice insurance provider to be sure that their policy includes protection from litigation for actions made while serving as a PR.

It is also possible for a CPA to serve as the PR for a partnership for which he or she performs no other services, thus making the PR truly independent. This may seem to be the best way to mitigate many of the risks associated with being a client's third-party PR. In practice, however, the amount of time needed to understand the partnership operations and taxation concepts for a client a CPA performs no other service for may likely make this cost-prohibitive.


The circumstances around being a third-party PR are not all negative. Who better to act on behalf of a partnership for tax matters than its current tax adviser? The adviser is already familiar with the client and its operations, knows significant investors or key players in the organization, and should already be an expert in the areas of tax that apply to the partnership. Tax notices received will not be filed away in the proverbial "bottom desk drawer" and can be responded to quickly with minimal disruption to the client's operations. In the event of an IRS audit, the tax adviser is already an immediate point of contact for the IRS and can respond appropriately. However, many of these advantages can be obtained through a proper power of attorney.

A weighty consideration

The BBA rules that allow a third party to act on behalf of the partnership, as well as the change in IRS adjustments being assessed at the partnership level, bring significant new challenges for tax practitioners. Tax professionals should be cautious of accepting this new duty without diligently weighing all the pros and cons and, as always, acting in the best interests of their client.


Anthony Bakale, CPA, is with Cohen & Company Ltd. in Cleveland.

For additional information about these items, contact Mr. Bakale at tbakale@cohencpa.com.

Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd.

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