By David Donnelly, CPA-Houston
There is an apparent inconsistency between Form 1065 and IRC Section 6223 regarding electing out of the centralized partnership audit regime (CPAR) and designating a partnership representative (PR).
The form is clear that if the partnership elects out of the CPAR, no PR can be designated. Most software will not allow this without an override and some software does not even allow an override.
Section 6223(a) clearly states that, “Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) with a substantial presence in the United States as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter.”
However, Section 6221(b)(1)(A) states that, “This subchapter shall not apply with respect to any partnership for any taxable year if…the partnership elects the application of this subsection for such taxable year.”
The election is an election out of all of Subtitle F, Subchapter C “Tax Treatment of Partnership Items,” which includes Section 6223; so, if 6223 does not apply, no PR can be, nor needs to be, designated.
If the partnership then elects out of the CPAR, the pre-TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) or non-TEFRA audit rules apply. Pre-TEFRA, there was no designation of a “tax matters partner” (TMP) or PR. Presumably, in the case of a partnership audit, the IRS will contact the partnership itself and begin audit proceedings with respect to its partners. Alternately, the IRS could audit partners individually regarding the partnership items on the partners’ returns. In a conversation with Treasury personnel, it was stated that ”it depends on the facts and circumstances.”
Evidently, naming a PR when electing out of the CPAR is like naming a TMP for a non-TEFRA partnership. The IRS has historically ignored the named TMP in a non-TEFRA partnership audit.
Since the election out of the CPAR is made annually and a partnership could become ineligible for the election, it is still a good practice for the partnership agreement to include procedures for designating a PR.