The final partnership audit representative rules could pose challenges for foreign parties that operate a domestic business without contacts in the country.
Finding an individual with a substantial presence in the United States, as required by the regulations, to serve on behalf of a partnership formed by two foreign entities may prove difficult, according to Jonathan Stein of Goulston & Storrs PC.
The IRS’s final regulations (T.D. 9839), published August 9, on designating a partnership representative clarify that the individual selected to act on behalf of the entity can spend most of her time in a foreign country and still serve as the representative if other qualifications are met. Those qualifications require the representative to be able to meet with the IRS at a reasonable time, as well as have a U.S. phone number for contact during normal business hours, a street address, and a taxpayer identification number.
However, the regulations state that even if those qualifications aren’t met, the individual selected as partnership representative can still bind the entity and its partners until he or she resigns or is removed by either the partnership or the IRS.
Stein said that if two foreign entities wanted to form a partnership to invest in the United States without having any people in the country, they may select an invalid individual as the representative and then wait for the IRS to later remove him. A third party could offer this type of service, he added.
Flurry of Guidance
The centralized audit regime enacted in the Bipartisan Budget Act of 2015 was implemented to help the IRS audit large partnerships, which has been a challenge for the agency for decades. Because the law is effective for tax year 2018, the IRS and Treasury have been releasing rules throughout the year.
Final rules were released in January on how some partnerships can elect out of the program, and technical corrections were signed into law in March tweaking the regime. Days after the final rules on the representative were released, the IRS reproposed rules on the broader aspects of the law, taking into account Congress’s changes.
The final rules on the representative took into consideration the tax community’s concerns about removing the representative. The representative can bind the partnership and its partners, so the fact that it took up to 30 days from the date of the representative’s removal for the change to become effective had raised concerns.
The IRS removed the 30-day effective date requirement and clarified that the partnership can name itself or even a disregarded entity as the partnership representative — as long as an individual is also named.
Tax attorney Fred Witt said the IRS has done an excellent job in releasing guidance on the partnership audit regime, but he added that the main message from the flurry of guidance is that the regime is here to stay and taxpayers must take it seriously. Partnerships should quickly update their operating agreements to reflect the news, Witt said, asking, “How are you going to designate a partnership representative when your documents are silent?”
Draft Forms Shed Light
Because the partnership representative must be listed on the return for the partnership in the applicable tax year, the IRS is working on the forms necessary to implement the new system.
On August 14 the IRS released a draft of new Form 8979, “Partnership Representative Revocation, Designation, and Resignation Form,” and provided insight into how the process will start to take shape.
Stein said the draft form is helpful and that it’s important to keep in mind that if the designated entity resigns or is removed, the designated individual is also removed. “The form makes that clear, if you didn’t pay attention to it before,” he said.