The Partnership Representative (PR) is a position established to streamline federal tax audits for partnerships. This role is the sole contact point between a partnership and the Internal Revenue Service (IRS) during an examination. The person or entity holding this designation possesses significant, binding authority over the tax matters of the partnership and all its partners. Understanding the scope of this authority is important for all partners in any entity taxed as a partnership.
The Context of Partnership Audits
The current centralized partnership audit regime was established by the Bipartisan Budget Act (BBA) of 2015, fundamentally changing how the IRS examines partnerships. The previous system was often cumbersome for the government, requiring the IRS to pursue tax assessments against individual partners in the event of an audit adjustment. This process became unwieldy, especially with large partnerships having hundreds or thousands of partners. The BBA legislation, codified under Internal Revenue Code Section 6221 et seq., shifted the assessment and collection of underpayments to the partnership level. This change necessitated a single, authoritative voice to represent the partnership during an audit, leading to the creation of the Partnership Representative (PR) role.
Defining the Partnership Representative Role
The Partnership Representative is the entity or individual designated to act on behalf of the partnership in all tax-related administrative and judicial proceedings with the IRS. This person has the exclusive right to represent the partnership and is the only party the IRS is required to communicate with regarding an audit. The PR functions as the partnership’s agent, possessing a level of authority that is unmatched by any partner acting individually. The PR’s designation must be made annually on the partnership’s tax return, Form 1065, for each taxable year. This designation is effective only for the specific tax year being audited, meaning the PR for the reviewed year is the one who acts on the partnership’s behalf.
The Extensive Authority of the Partnership Representative
The power granted to the Partnership Representative is broad and far-reaching, establishing the PR as the ultimate decision-maker in a tax audit. The PR has the sole authority to bind the partnership and all its partners, including former partners, to decisions made during the audit process. This authority means the PR can take actions that are legally binding on all parties without the consent or even the knowledge of the other partners. Actions the PR can take include entering into a settlement agreement with the IRS, extending the statute of limitations for adjustments, and agreeing to a Notice of Final Partnership Adjustment (FPA). Once the PR agrees to an adjustment or settlement, individual partners have no statutory right to appeal that decision or participate in the administrative proceeding.
Eligibility and Selection Requirements
The Partnership Representative must be a person or entity with a substantial presence in the United States. This requirement is satisfied if the PR possesses a U.S. taxpayer identification number, has a U.S. street address and telephone number with a U.S. area code, and is available to meet with the IRS in the United States. Unlike the prior role, the PR does not need to be a partner in the partnership; they can be an outside accountant, attorney, or other third-party professional. If the partnership designates an entity as the PR, it must also appoint a Designated Individual (DI) to act on that entity’s behalf. If a partnership fails to properly designate a PR on its annual tax return, the IRS is authorized to select and appoint a PR of its own choosing.
Critical Implications for Partnership Agreements
Given the PR’s expansive, unilateral authority, the partnership agreement becomes the primary tool for managing the associated risk. A well-drafted agreement should clearly define the process for selecting and removing the PR to ensure the position is held by a trusted party. The agreement should also establish internal governance rules, such as requirements for the PR to notify partners of an audit and consult with them before making binding decisions. Since the IRS does not recognize internal limitations, these provisions serve as contractual obligations between the PR and the partners, not limitations on the PR’s external authority. Partnership agreements should also include indemnification clauses to protect the PR from liability for actions taken in good faith on the partnership’s behalf.
Comparing the PR to the Former Tax Matters Partner
The Partnership Representative (PR) represents a significant shift from the previous Tax Matters Partner (TMP) role under the Tax Equity and Fiscal Responsibility Act (TEFRA) rules. The TMP was primarily a communication conduit, serving to receive notices from the IRS and relay information to the partners, and was required to be a general partner. The TMP had limited authority to bind individual partners, and partners retained the right to participate in the audit process. In contrast, the PR is not required to be a partner and possesses the sole and exclusive authority to bind all partners to settlements and adjustments. This change eliminated the statutory right of individual partners to receive direct notice of an audit or to participate in the proceedings.