The IRS on Tuesday 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 to 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 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 of a resigning or revoking partnership representative. The proposed regulations provided specific rules for notifying the partnership and the partnership representative, but because state law governs the validity of these notifications, the final rules specify that only the IRS must be notified, but do not provide rules for notifications between the partnership and the partnership representative, such as using certified mail.
The next portion of the rules address IRS designations of partnership representatives when a partnership has not designated anyone or when the partnership has made multiple designations and revocations in a short time period. In that case, the IRS must notify a partnership that it does not have a valid partnership representative designation within 90 days. The final regulations clarify how to determine that time period. They also retain the rule in the proposed regulations requiring the IRS to consent to a partnership’s revocation of a representative designated by the IRS either because the partnership did not appoint one or because of multiple resignations or revocations.
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.
One new item added clarifies 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.
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 are effective Aug. 9, 2018, the date they will be published as final in the Federal Register.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.