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Can Your US Partnership Representative Handle An IRS Audit? – Tax Authorities



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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.

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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.

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