Are you prepared for a conversation with the IRS?
If you're a fund manager of a partnership investing in the United States, you need to prepare for new audit rules enacted by the IRS. Whether you're in the US or somewhere else around the globe, you'll need to appoint a Partnership Representative (PR) to manager the audit process with the IRS. The catch? The PR needs to have a substantial presence in the US. We've answered some common questions and are prepared to help you further.
What exactly does "Substantial Presence" in the US mean?
Your PR will need to be available to meet in person with the IRS at any reasonable time and place, have a US tax payer ID, and a phone number and address in the US.
What types of tasks may the PR have to deal with?
The PR has replaced the "tax matter partner" position under prior law and has considerably more authority. The PR has the power to bind the partnership and all former and current partners with respect to the audit process. In fact, the new rules give the PR absolute power to conclude audit matters even if the partnership agreement specifically limits the PR's authority. The PR will also:
- Receive and forward IRS notices to the General Partner (GP)
- Attend meetings with the IRS, partners and advisers
- Execute and file documentation
- Regularly liaise with the GP and advisers regarding the partnership's audit and litigation strategy
Do I need a PR if my partnership is formed in a foreign country?
Any entity filing a partnership tax return in the US will need a PR, regardless of where the entity is formed or whether it's treated as a partnership for local law purposes. So, for example, if a Cayman exempted company elected to be taxed as a partnership for US tax purposes and files a US partnership tax return, it'll need a PR.
Can I opt out?
Yes, but the restrictions make it challenging. To qualify, the partnership must have 100 or fewer partners, and each of the partners must be an individual, a C corporation (or foreign entity taxed as a C corporation), an S corporation or an estate of a deceased partner. Importantly, opt out is unavailable if the partnership has any partnerships, trusts or disregarded entities as partners, three common types of fund investors. So funds will find it hard to opt out.
If I can't opt out, what are my options?
Consider leveraging a statutory and regulatory compliance expert to help. Appointing a third-party tax expert as PR ensures you're prepared if the IRS initiates an audit. The PR service agreement can specify that the PR won't engage with advisers, attend IRS meetings, file documents with the IRS or make any elections on behalf of the partnership without approval of the GP. This ensures full control of the audit process remains in the hands of the GP.
When do I need to make a decision?
The PR is appointed on the partnership's tax return, and deadlines vary depending on tax extensions. However, engaging a qualified PR now offers peace of mind knowing that someone suitable is available to answer to the IRS.
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.