What Is a Tax Matters Partner? Role and Responsibilities

For decades, the Tax Matters Partner, or TMP, was the designated individual who served as the principal point of contact between a partnership and the Internal Revenue Service (IRS). This role was formally established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Before TEFRA, the IRS had to engage with every single partner to conduct an audit, a process that was often inefficient. The creation of the TMP was intended to streamline these audit proceedings by centralizing communication and responsibility into a single, identifiable partner.

The Role and Responsibilities of a Tax Matters Partner

The primary function of the Tax Matters Partner (TMP) was to act as the liaison during an audit, meaning all initial communications and notices from the IRS were directed to them. A significant responsibility of the TMP was to receive and distribute important IRS notices to all other partners, keeping them informed about the progress of any administrative proceedings. This included notifying them of the start of a partnership-level audit and other significant developments.

The TMP was empowered to represent the partnership in both administrative and judicial proceedings. This authority allowed the TMP to participate in meetings with the IRS, respond to information requests, and select the court in which to challenge an IRS decision. While other partners also retained the right to participate in these proceedings, the TMP was the designated leader.

The TMP also held the authority to enter into settlement agreements with the IRS. This power was not absolute, as partners had the right to be notified and could sometimes choose not to be part of the settlement. The TMP could also agree to extend the statute of limitations for assessing tax on behalf of the entire partnership.

Designating the Tax Matters Partner

To be eligible for the role, the individual had to be a partner in the partnership, and regulations specified that the TMP generally had to be a general partner. For a limited liability company (LLC) taxed as a partnership, only a “member manager” was treated as a general partner for this purpose. The formal designation was made on the partnership’s annual tax return, Form 1065.

On a specific section of the return, the partnership would list the name and identifying information of the chosen TMP. This designation was effective for that specific tax year, and the partnership could change its designated TMP on subsequent returns.

In situations where a partnership failed to designate a TMP on its return, the IRS had default rules to identify one. The regulations stipulated that the general partner with the largest profits interest at the close of the tax year would be selected as the TMP. If there were multiple general partners with the same largest interest, the one whose name appeared first alphabetically would be chosen.

The Shift to the Partnership Representative

The landscape of partnership audits was altered by the Bipartisan Budget Act of 2015 (BBA). This legislation introduced a new centralized partnership audit regime that replaced the TEFRA system for tax years beginning after December 31, 2017. A central component of the BBA was the replacement of the Tax Matters Partner role with a new position known as the Partnership Representative (PR).

The most substantial difference between the TMP and the PR is the scope of their authority. The Partnership Representative is granted the sole authority to act on behalf of the partnership and to bind all partners in an audit or other tax proceeding with the IRS. Under the BBA, partners are bound by the decisions made by the PR and no longer have the same statutory rights to participate or opt out of settlements.

Another distinction is the eligibility requirements. While a TMP had to be a partner, the BBA allows for nearly any person, including an entity, to be designated as the Partnership Representative. The primary requirement is that the PR must maintain a “substantial presence” in the United States. This allows a partnership to appoint an external professional, such as an accountant or attorney, to serve in this capacity.

Relevance of the Tax Matters Partner Today

Despite being replaced by the Partnership Representative, the concept of the Tax Matters Partner remains relevant. The BBA’s new audit rules are effective for partnership tax years that started after the end of 2017. This means the old TEFRA rules, and therefore the TMP role, continue to apply to any IRS audit of a partnership tax year that began on or before December 31, 2017.

For example, if the IRS initiates an audit for a partnership’s 2016 or 2017 tax return, the agency will still operate under the TEFRA framework. The IRS will contact and work with the individual who was designated as the Tax Matters Partner for that specific year. All the rules regarding the TMP’s responsibilities for that audited year would still be in effect.

This continued applicability explains why business owners and partners may still encounter the term “Tax Matters Partner.” It can appear in older partnership agreements, legal documents related to pre-2018 tax matters, or in official correspondence from the IRS concerning an audit of a legacy tax year.