United States: Say Goodbye To The TMP And Hello To The PR

Late last year, the Bipartisan Budget Act of 2015 (the "Budget Act") was signed into law. Certain provisions within the Budget Act significantly change how the IRS conducts audits of partnership and LLCs taxed as partnerships. The changes were adopted to raise revenue without increasing taxes by streamlining the IRS's partnership audit and collection processes. The new rules apply to partnership returns filed for taxable years beginning after December 31, 2017, although a partnership may elect to have the new rules apply after the date of enactment and before January 1, 2018.

The Existing Regime

Currently, the IRS audits partnerships using one of three different regimes, primarily depending upon the number of partners. For partnerships with ten or fewer partners, the IRS audits the partnership and each partner separately. Partnerships with more than ten partners are generally audited by way of a single administrative proceeding known as a "TEFRA" audit, named for the Tax Equity and Fiscal Responsibility Act of 1982. Under TEFRA, the IRS shifted the audit of partnership items from the partner to the partnership level. However, the IRS still must assess any resulting adjustment against each of the partners in the applicable tax year. Additionally, the IRS must give notice of the beginning of an audit and any resulting adjustment to all partners whose names and addresses have been furnished to the IRS and the Tax Matters Partner ("TMP")—designated by the partnership. The TMP participates in the audit on behalf of the partnership and informs the partners of the status of the TEFRA examination.

Partnerships with 100 or more partners may elect to be treated as "electing large partnerships" ("ELPs"). Although technically part of the TEFRA rules, the ELP audit regime differs in several respects. First, partnership adjustments generally flow through to current-year partners holding a partnership interest during the year in which the adjustment takes effect. The partnership may elect to pay an imputed underpayment instead of flowing an adjustment through to its partners. Even if an election is not made to pay the tax due at the partnership level, the partnership (rather than the partners) is liable for any interest or penalties resulting from the adjustment.

Under the ELP rules, a single representative must be appointed to represent the partnership in audit proceedings, and the IRS is not required to give notice of the commencement of proceedings or of a final adjustment to individual partners. Only the partnership, not the partners individually, can petition for a readjustment of partnership items.

The New Rules

The Budget Act repeals the TEFRA regime and replaces it with a regime that in some ways mirrors the ELP rules. In general, the new rules decrease the ability of individual partners to participate in the audit process and shift much of the focus to the partnership level. Among the important changes created by the new Budget Act regime are the following:

  • Like the ELP regime, the new Budget Act regime allows the IRS to collect an underpayment of tax, penalty, and interest from the partnership itself.
  • An underpayment of tax is imputed to the year during which the adjustment is finally determined. Thus, partners of the partnership in the "adjustment year" bear the tax burden of the adjustment, as opposed to partners in the "reviewed year", which is the partnership taxable year to which the item being reviewed relates. Significantly, this has the potential to expose current partners to the tax liability of past partners.
  • The tax to be paid is calculated at the highest tax rate for the reviewed year on the net income amount resulting from netting the adjustments. This is a new concept referred to as the "imputed underpayment."
  • Under the Budget Act regime, partnerships must designate a liaison with the IRS, known as the Partnership Representative. Increased powers are granted to that representative and the ability of individual partners to participate in the audit process is significantly decreased.
  • The new rules eliminate many of the notice and participation rights of individual partners.
  • The statute of limitations for partnership assessments commences when the partnership's information return is filed and no longer takes into account the date individual partners' returns are filed.

These changes raise potential issues that must be considered when drafting any partnership agreement. For example, does the agreement contain adequate indemnification provisions providing for how imputed underpayments will be paid? Does or should the agreement provide that former partners will indemnify the partnership and/or partners during the adjustment year for their share of the reviewed year liability? Should the agreement provide for withholdings from cash flow to fund future tax liabilities? Does the agreement provide a process for selecting a Partnership Representative? To whom does the Partnership Representative owe a fiduciary duty and what are those duties?

The new rules do permit a partnership to modify or avoid tax assessment and collection at the partnership level in certain situations. First, partnerships with no more than 100 partners otherwise meeting certain requirements can make an annual "opt out" election on a timely filed tax return. If a partnership opts out of the new regime, the IRS will examine the partnership and partners under the rules applicable to individual taxpayers. Second, a partnership may opt out of the "imputed underpayment" process by providing each partner in the reviewed year and the IRS with a statement of each partner's share of any adjustment. This election must be made within forty-five days of receiving a notice of final adjustment. In this scenario, "reviewed year" partners pay the additional tax on their current year individual tax returns. Finally, the amount of the "imputed underpayment" may be reduced where one or more of the "reviewed year" partners files an amended return for the reviewed year and pays the additional tax allocable to that partner.

These "opt out" provisions create additional drafting considerations. Should the agreement limit the number of partners to 100 so that the partnership may always opt out of the new regime? Should the agreement require the partnership to make the annual "opt out" election on its tax return? Should the agreement require "reviewed year" partners to file amended returns in the event of an adjustment or pay their share of the additional tax on current year returns? (Note that the filing of amended returns by "reviewed year" partners may reopen the statute of limitations on the entire return.)


These are just some of the issues raised by the new Budget Act rules that will apply to partnership audits beginning in 2018. The bottom line: All partnerships and LLCs taxed as partnerships should re-examine and amend their current agreements to ensure that the ramifications of the new rules are taken into account. Drafters of future partnership agreements should also be sure to anticipate possible consequences of federal and state partnership audits under the new regime and include appropriate provisions. Given that the new rules were enacted with the goal of increasing IRS partnership audits, it is all the more imperative that partnership agreements take the new rules into account.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Ropes & Gray LLP
Dickinson Wright PLLC
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Ropes & Gray LLP
Dickinson Wright PLLC
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions