What Does a Partnership Representative Do?

The Bipartisan Budget Act of 2015 (BBA) established a centralized audit system for partnerships and, in doing so, created the role of the partnership representative. This individual or entity is granted the exclusive authority to act on behalf of the partnership and its partners during IRS examinations. This role is a shift from the previous “tax matters partner” system, concentrating all decision-making power into a single point of contact for the IRS. The representative’s actions and decisions legally bind the partnership and every partner, which highlights the importance of selecting the appropriate representative.

Eligibility Requirements for a Partnership Representative

The IRS allows any “person” to serve as a partnership representative, a term defined broadly to include individuals, trusts, estates, and business entities. This flexibility permits a partnership to select a representative that is not a partner or employee, such as an external professional. The main condition for eligibility is maintaining a “substantial presence” in the United States.

To meet the substantial presence test, the representative must have a U.S. taxpayer identification number, a U.S. street address, and a U.S. telephone number. The representative must also be reasonably available to meet with the IRS in person within the United States.

If a partnership designates an entity as its representative, it must also appoint a “Designated Individual” to act on the entity’s behalf. This is the person the IRS will communicate with and is subject to the same substantial presence requirements as any other representative. The partnership must identify both the entity and the Designated Individual on its tax return.

Authority and Core Responsibilities

The partnership representative holds the sole authority to represent the partnership in all matters related to an IRS audit. This power means the representative’s decisions bind all partners, regardless of conflicting provisions in the partnership agreement. The IRS is not bound by any private agreements that attempt to limit the representative’s authority.

The representative’s duties include responding to IRS notices, negotiating with agents, and making binding settlement agreements. A key power is making elections, such as the “push-out” election under Internal Revenue Code Section 6226. This election shifts tax payment responsibility from the partnership to the partners from the audited year. The representative uses Forms 8986 and 8985 for this process.

While IRS regulations grant this power, the duty to keep partners informed is governed by the partnership agreement. Federal tax law does not impose communication requirements on the representative toward the partners. Without contractual provisions for updates, partners have no statutory right to participate in the audit process.

Designating the Partnership Representative

A partnership officially designates its representative on an annual basis when it files its U.S. Return of Partnership Income, Form 1065. A specific section on the return is dedicated to this designation. The designation for a specific tax year cannot be changed unless the partnership is selected for an audit for that year.

To complete the designation, the partnership must provide the representative’s legal name, full U.S. address, and a valid taxpayer identification number (TIN). This could be a Social Security Number (SSN) for an individual or an Employer Identification Number (EIN) for an entity.

If the partnership designates an entity as its representative, it must also provide the required information for the Designated Individual on Form 1065.

Revoking or Changing a Designation

Once a partnership tax year is under examination, the representative can be changed. A partnership can revoke a representative’s authority, or a representative can resign, by using Form 8979, Partnership Representative Revocation, Designation, and Resignation. This form is filed directly with the IRS point of contact for the audit. A change cannot be made before an audit begins for that tax year.

A revocation by the partnership requires a signature from a person who was a partner during the tax year under review and who is authorized to make the change. A resignation, on the other hand, is initiated by the outgoing representative. The form allows the partnership to name the successor representative at the same time.

Filing an Administrative Adjustment Request (AAR), which is a way for a partnership to amend a return, can also be a trigger for changing a representative. However, an AAR cannot be filed for the sole purpose of changing the representative. The change must be part of a legitimate adjustment request.

Consequences of Failing to Designate

If a partnership neglects to designate a representative on its Form 1065, the BBA grants the IRS the authority to appoint one on the partnership’s behalf. The IRS is not required to select a partner and can designate any person it deems appropriate, which could even include an IRS employee in limited circumstances.

The person selected by the IRS may not have the partnership’s best interests as their priority, but their decisions will still be legally binding on the partnership and all its partners. Furthermore, once the IRS designates a representative, the partnership cannot revoke that designation. A change can only occur if the IRS-appointed representative chooses to resign.

This potential outcome highlights the importance of making a valid designation on every annual tax return to manage compliance under the centralized audit regime.