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Tax

Partnerships need to consider new U.S. tax representative role

With the recent introduction of new partnership audit rules that set out who can represent a business before the IRS on tax matters, now is the time for partnerships — both U.S. and foreign — to act proactively to ensure they comply with the strict requirements of the new role, U.S. tax attorney (NY, DC) Alexey Manasuev tells AdvocateDaily.com.

Last August, the IRS finalized the proposed regulations, requiring any foreign or domestic partnership that is subject to U.S. tax, with limited exceptions, to appoint a “partnership representative,” who will be responsible for communicating with the IRS on any audit or tax matters, effective from the 2018 tax year.

“Partnerships that are required to file their tax returns by March 16, 2019 will be affected by this new regime, and it’s quite a significant development,” explains Manasuev.

The new role replaces the former “tax matters partner” that partnerships were required to appoint in earlier tax years, says Manasuev.

“The tax matters partner would sign the tax return on behalf of the partnership, deal with the IRS and other partners in case of an audit and other inquiries and matters involving the IRS. Generally, anybody could have been a tax matters partner — it could have been a business entity, it could have been an individual partner,” he adds.

But while the partnership representative's role is similar to the concept of tax matters partner, Manasuev cautions that the new regime carries much stricter conditions for who can fill the role.

“To be a partnership representative, either an individual or a business entity will have to meet certain requirements. First, it must be a person who has a substantial presence in the United States.”

“The representative must make themselves available to meet in person with the IRS in the United States at a reasonable time and place. That determination is based pursuant to the Treasury regulations which deal with examination and how the IRS conducts its audits. Sometimes the IRS auditor may visit the taxpayer at their location, or may require the taxpayer to appear at the IRS office, and so, generally speaking, to be available to be appointed as partnership representative, the person should at least have the ability to enter the United States,” says Manasuev.

In a Canada-U.S. context, he adds, arguably, the partnership representative should have a U.S. work visa, as when they are representing the business before the IRS on an audit or tax matter, they should be considered to be working in the United States.

Furthermore, the partnership representative must have a U.S. taxpayer identification number, says Manasuev.

“A foreign partner in a U.S. partnership or a foreign partnership with U.S. source income or income effectively connected to the partnership's U.S. trade or business can apply for an Individual Taxpayer Identification Number (ITIN) if an individual, or Employer Identification Number (EIN), if a business entity," he says.

The individual is also required to have a U.S. street address and a telephone number with a U.S. area code.

Although partnerships are permitted to appoint a designated individual to serve as the partnership representative, and several businesses in the United States offer these services, Manasuev notes that there are limitations in place.

Businesses also need to keep in mind that the partnership representative role carries a lot of power and responsibility.

“What is critical about the partnership representative's role is that the person has the authority to bind the partnership and the partners on an audit and that authority is pretty much absolute,” he says.

“While selecting the partnership representative, taxpayers should really pay attention to who they select, to ensure that they don’t run into any issues because, if in the future, they are audited and, for example, the partnership representative enters into a settlement with the IRS, that settlement will be binding for the partnership and the partners,” adds Manasuev.

Although finding a partnership representative that is the “right fit” will be key, Manasuev says the critical area for most businesses at this point is simply knowing about the requirement.

“Some tax preparers may not be aware of this requirement. And the tax advisors really have a job of making sure clients are protected, alerting their clients to this issue and acting proactively, because if everybody realizes it on the day they need to sign the partnership (Form 1065) return, then they may have to extend their return, or they may file it without this critical piece of information,” he adds.

"It is uncertain at this point whether a partnership return without a partnership representative may stop the statute of limitation from running. But it is possible that a partnership return without a partnership representative or with a 'partnership representative' who does not meet the IRS requirements, may be considered incomplete. This could result in the tax year to be open," says Manasuev.

Ultimately, Manasuev says the IRS will not discuss tax matters involving the business in the absence of the partnership representative.

“This is the time when people should pay attention, taxpayers really should be thinking about this, and more importantly tax return preparers and U.S. tax advisors should be bringing up this issue with their clients,” says Manasuev.

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