Since the Bipartisan Budget Act of 2015 imposed new rules on US partnerships for tax filings, the annual requirement to appoint a US-based partnership representative is now well understood, having been in place for the past four tax years. Selecting a US partnership representative, however, is more than a standard box checking exercise. Unforeseen circumstances may require the partnership representative to engage with US tax authorities and, in the case of an audit by the Internal Revenue Service, the partnership representative will need to manage this critically important process.
New partnerships looking to make this election for the 2022 tax year should appreciate that while the regulations state that a partnership representative must have a substantial presence in the US and be contactable by the IRS, this alone may not be sufficient to successfully assist in navigating certain events such as an IRS audit. Selecting a partnership representative with direct experience with the IRS audit process can provide significant comfort during what can often be a challenging and unusual experience for an investment manager.
The US partnership representative can technically make elections, sign tax returns, and agree to IRS audit adjustments, with the partnership and its partners bound by these decisions. As such, the ideal partnership representative and designated individual appointed to deal with the IRS on behalf of the partnership should be a collaborative, trusted partner as well as being familiar with US tax legislation and have relevant experience in dealing with IRS audit procedures.
When selecting a US partnership representative it is important to be aware that under the legislation, the partnership representative has the sole authority to act on behalf of the partnership and its partners and can bind the partnership "for all purposes". This means that during an audit, the partnership representative on behalf of the partnership could enter into a settlement agreement, or a notice of final partnership adjustment ("FPA") could be issued if the partnership or partnership representative does not contest it. The FPA at a minimum will provide information on the final audit adjustment and outline procedures to mount a challenge in court, as well as any interest and penalties that are applied. A final decision of a court with respect to the partnership if the FPA is contested, would bind all partners. In these scenarios, the depth of experience of a designated individual can provide a significant advantage or avoid unintended consequences.
The Maples Group's Delaware office has a substantial presence in the US, providing partnership representative services and individuals with specialist investment fund experience to act as designated individuals, in order to liaise with the IRS and handle any matters. This expertise was put to the test recently where the Maples Group, acting as partnership representative for a large investment fund, successfully completed an IRS audit on behalf of its client, with no adjustments required to the financial statements. From our discussions with the IRS, we understand this was one of the first few partnership audits to take place under the new regime.
"As partnership representative for a large investment fund, the Maples Group successfully completed an IRS audit, with no adjustments required. From our discussions with the IRS, we understand this was one of the first few partnership audits under the new regime."
Working alongside the manager's tax advisors, the Maples Group partnership representative worked closely with the IRS to ensure all its requests were dealt with in a timely manner. This positive result demonstrates the Maples Group's capability in this scenario. Another factor is that Maples assigns dedicated, experienced professionals exclusively to partnership representative services, which means they can devote sufficient time and resources to the intensive audit process.
With the September 15 deadline for the annual requirement for US partnerships to designate a partnership representative in its tax returns now approaching and the necessity for newly formed partnerships to make such an election, the Maples Group's Delaware office can provide partnership representative solutions with experienced professionals acting as designated individuals. In this capacity, the Maples Group will work closely with the partnership's general partner or managing member, administrators and US tax advisors, to ensure all necessary obligations are fulfilled to the highest standards and any challenging circumstances are effectively navigated.
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.