As of this year, following implementation of the Bipartisan Budget Act of 2015, LLC’s, partnerships, and other pass-through entities must have a designated Partnership Representative. The Partnership Representative replaces the Tax Matters Partner. This is more than just a title change. The Partnership Representative has far more authority and responsibility than the Tax Matters Partner. Under previous law, the Tax Matters Partner was responsible for being the entity’s representative in the event of an IRS audit or any other contact with the IRS, but had limited authority to bind the other partners. As of January 1, 2018, that role has been eliminated and replaced with the Partnership Representative. The Partnership Representative will have significantly more authority to bind the other partners with respect to an IRS audit proceeding. That means that the Partnership Representative can have full and absolute discretion to settle with the IRS, pay the imposed taxes and penalties, proceed to litigation, agree to extend the statute of limitations, etc., all without consulting or even notifying the other partners.
Unlike a tax matters partner, the Partnership Representative need not be a partner/owner of the entity. In other words, the partners can designate a non-owner third party to be the Partnership Representative. Even if the partners have not formally elected a Partnership Representative, when the entity files its tax returns, it will be asked to provide the name of the partnership representative each year. Failure to do so could result in the IRS appointing a Partnership Representative for the partnership.
Accordingly, owners of pass-through entities should take action now, such as appointing a Partnership Representative by resolution and/or amending their partnership/operating agreements to address this and other related changes to pass-through entity law under the Bipartisan Budget Act of 2015 that came into effect this year. For example, beyond merely appointing a Partnership Representative, the partnership/operating agreement can dictate how the representative is appointed and replaced, and can provide for certain parameters, such as requiring the representative to keep the other partners in the loop. Agreeing on these terms now will be far easier than waiting until the company is faced with an IRS audit.