August 9, 2018 IRS releases final regulations implementing new partnership audit regime In final regulations (TD 9839), the IRS has adopted, with some changes, proposed regulations (REG-136118-15) under Section 6223 related to the designation of a partnership representative and rules regarding the authority of the partnership representative under the new centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA). The final regulations also adopt, without substantive change, the temporary rules allowing a partnership to elect to apply the new partnership audit regime to tax years beginning after November 2, 2015, and before January 1, 2018. This Tax Alert discusses the comments received and changes made in the final regulations. Background The BBA significantly alters the audit and income tax liability rules governing partners and partnerships for tax years beginning after December 31, 2017. (The legislation is discussed in Tax Alert 2015-2085.) On June 13, 2017, the IRS released proposed regulations (REG-136118-15) under the BBA, which provided guidance on the applicable procedures, the determination of the amount of taxes, interest and penalties owed, and other consequences of an adjustment to a partnership tax return. Among other provisions, the regulations included procedures for opting out of the new regime, designating a partnership representative, filing administrative adjustment requests, and, most importantly, determining amounts owed by a partnership or its partners from adjustments following partnership exam. See Tax Alerts 2017-0168 and 2017-1002 for a detailed discussion of the new rules. The BBA included an election to apply the rules to certain years prior to 2018. This election is discussed in Tax Alert 2016-1344, which covers temporary (TD 9780) and proposed (REG-105005-16) regulations setting forth the time and manner for electing to apply the new partnership audit regime enacted by the 2015 BBA, for partnership tax years beginning after November 2, 2015 (the BBA enactment date) and before January 1, 2018. Final regulations Early election into BBA The final regulations adopt, without substantive change, proposed regulations (REG-105005-16) issued in August 2016 on electing into the regime and remove the corresponding temporary regulations (TD 9780). Eligibility to serve as the partnership representative The final regulations, effective August 9, 2018, adopt portions of proposed regulations (REG-136118-15) issued in June 2017 regarding Section 6223. The final regulations specify that any person as defined in Section 7701(a)(1), including a disregarded entity, can serve as the partnership representative provided that person meets the requirements of Reg. Section 301.6223-1(b). However, if an entity is appointed, the partnership must also appoint a "designated individual" who also satisfies these requirements. The final regulations clarify that a partnership may designate itself as its own partnership representative, provided that it also appoints a qualified designated individual. The final regulations retain the rule that the partnership must appoint the designated individual on its partnership return for the relevant tax year. The final regulations, like the proposed regulations, require that a person must have a substantial presence in the United States to be the partnership representative but declined to adopt several requests for clarification regarding when a person is considered to have made themselves available to meet in person with the IRS as part of the substantial presence requirement. The final regulations cross-reference the rules of Reg. Section 301.7605-1, which are existing regulations relating to the reasonable time and place for an examination applicable to all examinations, including examinations under the centralized partnership audit regime. The final regulations removed the five specific events contained in the proposed regulations, which, if present, would cause a partnership representative to no longer have the capacity to act as partnership representative for purposes of Section 6223 (i.e., the capacity to act). This capacity to act requirement was removed because the IRS believes that partnerships are in the best position to make the decision as to who can best represent them before the IRS. However, the IRS may still determine that a designation of the partnership representative is not in effect due to circumstances where the partnership representative fails the substantial presence test (such as if a partnership representative is incarcerated). Time for changing the partnership representative, resignation and revocation Many comments were submitted on the timing and mechanics aspects of revoking the designation of the partnership representative. The final regulations permit the partnership representative or designated individual to be changed at any time, with IRS consent. Otherwise, a change is permitted only in an administrative proceeding or in conjunction with the filing of a valid administrative adjustment request (AAR). With respect to the process of changing the partnership representative during an administrative proceeding, the final regulations provide that the IRS will generally first send a notice of selection for examination to the partnership notifying the partnership that the return is under exam. This letter will be issued prior to the Notice of Administrative Proceeding (NAP). As explained in the preamble, this rule will provide the partnership an opportunity to change its partnership representative before an administrative proceeding commences, allowing the partnership to be represented by the partnership representative of its choice throughout the administrative proceeding. The preamble to the final regulations further explains that because the notice of selection for examination is only issued to the partnership, and not the partnership representative, this rule allows the partnership to make a change to the partnership representative without the involvement of the partnership representative (whom the partnership may be removing). The final regulations continue to prohibit the filing of an AAR solely to change the partnership representative or designated individual. In response to comments, the final regulations eliminate the rule in the proposed regulations that permitted a resigning partnership representative or designated individual to designate a successor. The IRS recognized that there may be conflicts among partners and that the partnership itself should therefore be empowered to appoint a successor. In response to comments, the final regulations allow any person who was a partner at any time during the tax year to which the revocation relates to sign the revocation. Regarding timing, the final regulations specify that a partnership representative resignation or revocation is effective immediately upon receipt by the IRS. Notification of change The final regulations require a resigning partnership representative and a partnership making a revocation to notify the IRS of the change in designation. The final regulations specify that the failure of the IRS to send any notifications under Sections 301.6223-1(d) and (e) to acknowledge receipt of a valid resignation or revocation does not invalidate the resignation or revocation. IRS designation of partnership representative In some situations, the IRS is permitted to designate a partnership representative or designated individual. The proposed regulations included a list of factors the IRS "may" consider when designating a partnership representative. The final regulations clarify that while it will ordinarily consider these factors, the IRS may not consider the factors in every case as the factors are not the equivalent of requirements for eligibility to be designated by the IRS as a partnership representative. The final regulations also require that if the IRS designates an entity to be the partnership representative, the IRS will also appoint a designated individual and provide the contact information of the designated individual to the partnership. If the IRS designates the partnership representative, in order to revoke such a designation, the partnership must receive permission from the IRS for a revocation to be effective. If the IRS consents to the revocation, the IRS must send the partnership notification granting permission for the revocation. If permission is granted by the IRS, the revocation is effective on the date of the IRS notification letter. The final regulations provide that the IRS is not required to notify the most recent partnership representative if the IRS re-designates the partnership representative. Multiple revocations The proposed regulations provided that the multiple-revocation rule was triggered if the IRS receives more than one revocation for the same partnership tax year within a 90-day period. The final regulations remove the language "signed by different partners" from that provision. The fact that multiple revocations are received within 90 days is all that is required for the IRS to exercise its discretion under Reg. Section 301.6223-1(f)(2) to determine that a partnership representative designation is not in effect. Once this occurs, the partnership will not be given an opportunity to designate the successor partnership representative prior to the designation of a partnership representative by the IRS. The IRS will designate a partnership representative by notifying the partnership of the name, address and telephone number of the new partnership representative. Authority of the partnership representative The final regulations provide that the failure to adhere to state law requirements has no effect on actions taken by the partnership representative with respect to the centralized partnership regime. Other comments and changes The final regulations clarify that granting of a power of attorney (POA) to represent the partnership during an examination does not constitute a designation of the partnership representative. The final regulations allow the IRS to withdraw a NAP after it has been issued and state that the withdrawn NAP has no effect for purposes of the centralized partnership audit regime. The final regulations clarify that contact information must be updated if required by forms, instructions or other guidance published by the IRS. Implications The provisions dealing with the appointment and replacement of the partnership representative and designated individual will be of great importance once audits commence under the new system. Partnerships should be sure to appoint a qualified person to act as the partnership representative and, if necessary, a designated individual, and to anticipate in their partnership agreement the process for replacing the representative or designated individual. The IRS also has recently opened a number of partnership examinations for the 2016 tax year for partnerships that are eligible to elect into the BBA regime. The opening letter from the IRS will advise partnerships that they have 30 days to elect into the BBA regime. Taxpayers should consult with tax advisors as to whether it may make sense to make the election. One important factor to consider in making this decision is how the IRS administrative Appeals process fits into a centralized examination under the BBA regime because the IRS has not issued any guidance on how a partnership subject to an audit under the BBA regime may request Appeals consideration for un-agreed adjustments proposed by exam. ———————————————
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