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The Role of the Personal Representative Under the New Centralized Partnership Audit Rules

Jan 30, 2019

Federal audits of partnership tax returns for tax years beginning after December 31, 2017, will be drastically different than in the past. While the old partnership audit regime (known as a TEFRA audit) resulted in the partners being liable for the tax implications resulting from an IRS audit, this new audit regime (known as a BBA or centralized audit) potentially creates an actual tax liability at the partnership level for any audit adjustments made to partnership-related items. In addition, these new rules are expected to result in a significantly greater number of IRS audits of partnerships because they are intended to simplify the audit and collection process for the IRS.

Under these new rules, the role of the Tax Matters Partner has been eliminated and replaced with the Partnership Representative (PR). This article will provide details regarding who can serve as a PR, how the partnership appoints the PR, the responsibilities of the PR, and various other important issues surrounding this new role. Note that if the partnership is qualified to elect out of the BBA audit rules and has in fact so elected, then that partnership is not required to designate a PR. However, the partnership may choose to designate a PR anyway, in the event the election out is subsequently deemed to be invalid. See our separate article on the election out of the BBA audit rules for further details.

Who Can Serve as the PR/DI?

The partnership is allowed to appoint any person or entity (including a disregarded entity or even itself) to be the PR. If the partnership designates an entity as its PR, the partnership must also appoint a Designated Individual (DI). The PR/DI must have a substantial presence in the United States, meaning:

  • He or she must be available and willing to meet with the IRS in person in the United States at a reasonable time and place, as determined by the IRS.
  • He or she must have a U.S. street address.
  • He or she must have a phone number with a U.S. area code.
  • He or she must have a U.S. taxpayer identification number.

Interestingly, the PR/DI is not required to be a partner of the partnership. In fact, if the partnership is considering appointing a partner to be the PR/DI, they should be aware of the potential for a conflict of interest between that partner and the remaining partners. Also, if the PR is an entity, the DI is not required to be an employee of the PR.

How Is the PR/DI Appointed?

The partnership is required to appoint a PR/DI separately for each tax year, and that appointment is effective only for the tax year for which it is made. The appointment must be made on the partnership’s Form 1065, U.S. Return of Partnership Income, for the year to which the appointment relates, with the appointment effective when that return is filed. Since the BBA audit rules are first in effect for tax years beginning after December 31, 2017, the first appointment of a PR/DI will generally be made on a calendar-year partnership’s 2018 Form 1065. For partnerships with short tax years, that return might already have been filed or will be filed soon.

What if the Partnership Fails to Appoint a PR/DI?

If the IRS determines that a designation of a PR/DI is not in effect or if the designated PR/DI does not have a substantial presence in the United States, the IRS has broad authority to appoint a PR/DI for the partnership. In such a case, the IRS is generally required to first give the partnership 30 days to designate a PR/DI itself.

The IRS will consider the following factors when making its determination:

  • The views of the majority partners
  • The knowledge of the person about the partnership's tax or administrative matters
  • The person's access to the partnership's books and records
  • Whether the person is a U.S. person
  • The profits interest of the partner, in the case of a partner as the PR

No single factor listed above is determinative, and a person may be designated by the IRS as a PR/DI even if none of the factors are applicable. However, despite this broad discretion, the regulations state that the IRS should not designate an IRS employee, agent or contractor who has no affiliation with the partnership as a PR/DI.

The IRS may also determine that a designation of a PR/DI is not in effect when the IRS has received multiple revocations within a 90-day period. To avoid having to sort out the issue under such circumstances, the IRS is authorized to appoint a PR/DI and need not give the partnership the otherwise-required 30 days to designate the PR/DI itself.

Can a PR/DI Resign?

Under the regulations, a PR/DI may resign for any reason by notifying the IRS in writing; however, the PR/DI is allowed to do so only after the IRS issues a Notice of Administrative Proceeding (NAP). A PR/DI who resigns may not pick his or her successor; that is the responsibility of the partnership.

Can the Partnership Revoke the PR/DI’s Appointment?

Imagine this scenario:

A partnership designates X as the PR for the tax year ended December 31, 2018, but then, after a falling out with X, the partnership designates Y as the PR for the following tax year, ended December 31, 2019. In 2021, the IRS examines the partnership's 2018 tax return. X is the PR for the 2018 tax year, notwithstanding the fact that the partnership designated Y in 2019.

So what can the partnership do if it really does not want X to participate in the audit of its 2018 tax return? Unless the PR/DI was designated by the IRS (see discussion above), the partnership has unilateral power to revoke the designation of a PR/DI for any reason or for no reason at all. If the PR/DI was designated by the IRS and the partnership wishes to revoke that designation, the partnership must receive IRS approval to do so.

The revocation is made by notifying the IRS in writing. The revocation can be signed by any partner who was a partner during the partnership taxable year to which the revocation relates. The revocation requires the simultaneous designation of a successor PR/DI for the tax year of the revocation. The revocation is immediately effective upon the IRS's receipt of the written notification (not upon mailing, so a partnership may want to consider hand delivery of its revocation to a local IRS office or directly to the IRS employee handling the administrative proceeding to accelerate its effective date).

Unlike under the resignation rules, whereby the PR/DI can resign only after the issuance of an NAP, the partnership may revoke the PR/DI's appointment before that point, when the IRS first issues a notice of selection for examination to the partnership. In addition, the partnership may also revoke the designation when filing an Administrative Adjustment Request (AAR), basically a partnership amended return under the prior TEFRA rules, but the AAR may not be filed by the partnership solely to revoke the designation.

Also, if the PR/DI was designated by the IRS (see discussion above), the partnership has the ability to revoke that IRS-designated PR/DI and make its own designation. However, that revocation is effective only with the consent of the IRS.

What Are the Responsibilities of the PR/DI?

Under the new partnership audit rules, the PR/DI has broad and exclusive authority to act on behalf of the partnership and all the partners (both direct and indirect) with respect to all matters involving an audit of partnership-related items and any resulting partnership tax controversy. Accordingly, the PR/DI will also serve as the main contact for receipt of notices of audits, notices of any proposed audit adjustments, and notices of any final adjustments. The PR/DI is also the only party who can file an AAR with the IRS.

The BBA rules, unlike the TEFRA audit rules, do not provide partners the right to be notified at the beginning of the audit or at any other stage of the audit. The partners also do not have the right to participate in the audit, appeal or later judicial review. Thus, the partners can be bound by the results of the partnership audit despite having no notice of or participation in that audit at all.

The regulations clarify that the PR/DI does have the ability to execute powers of attorney, appointing other individuals to act on his or her behalf. The holders of the power of attorney can participate in meetings and receive copies of correspondence related to the audit proceeding.

Can the Partnership Place Any Restrictions on the PR/DI?

The regulations state that no state law, partnership agreement or other document or agreement may limit the authority of the PR/DI under the BBA audit rules. Any restrictions that the partnership or other partners attempt to impose on the PR/DI’s authority will be ignored by the IRS. That being said, the partnership should still consider whether it wants to impose certain restrictions or requirements upon the PR/DI so if the PR/DI does not act according to the partnership’s expectations, the partners may have some recourse against the PR/DI. Such restrictions could be included in the partnership agreement or in a separate agreement between the partnership and the PR/DI. Because the IRS is not a party to those agreements, it is not bound by them, but the PR/DI would be.

Possible restrictions or requirements the partnership may want to impose on the PR/DI include:

  • Whether the PR/DI will be compensated for his or her services.
  • A requirement that the PR/DI notify the partners that the partnership is going to be audited and then again at certain points throughout the audit process.
  • A requirement that the PR/DI receive majority or unanimous approval from the partners prior to certain activities such as extension of the statute of limitation, agreement to a final audit adjustment, filing of an AAR, making any elections necessary under the BBA audit rules (e.g., the election to opt out or the election to push out), pursuit of appeals or other litigation regarding the audit results, etc.

In addition to imposing these restrictions or requirements on the PR/DI, the partnership may want to address the following issues in the partnership agreement:

  • Who will be the initial PR/DI, and how will the partners select successor PR/DIs?
  • What actions by the PR/DI will justify revocation of the appointment?
  • How will the PR/DI be held liable for failure to perform his or her duties?


Crystal Christenson, CPA, MST
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