Updated November 3, 2020:

What is a tax matters partner? This individual is a member of a partnership who is responsible for representing the business to the IRS in a specific tax year. This includes providing tax information to other members, preparing and filing tax returns, and managing audits and investigations. The partnership may also give them additional responsibilities, such as making tax elections on behalf of the business. The IRS has specific requirements that specify how the tax matters partner is designated.

Bipartisan Budget Act of 2015

The Bipartisan Budget Act of 2015 made substantial changes to rules for partnership IRS audits, including replacing the tax matters partner with a partnership representative. This individual has expanded responsibilities compared to a tax matters partner, so it's important to indicate the responsibilities you want your tax representative to have in your operating or partnership agreement.

Tax matters partners have limited authority and are currently only used for TEFRA auditing processes. In contrast, partnership representatives have nearly unlimited authority to deal with the IRS on behalf of the partnership. This includes binding legal processes such as audits, litigation, and settlement authority.

While a tax matters partner must be a member of the partnership, the partnership representative does not. If you do not designate a representative, the IRS may select one on your behalf.

Companies can limit the authority of their partnership representative with provisions in the operating agreement, such as requiring a partnership vote for certain actions, establishing how this individual is elected and removed, and imposing a level of duty to make an unbiased decision.

Partnership Level Liability

Another major change in the legislation removes the burden of tax collection from the IRS and places it on the partners. They, in turn, must determine who contributes funds to pay the business taxes.

The partnership representative has sole authority to bind the partnership and must have a substantial living and/or working presence in the United States. This is defined as:

  • Being available for in-person IRS meetings in the U.S.
  • Having a U.S. street address and phone number.
  • Having a taxpayer ID number in the U.S.

Partners no longer need to participate in audits. As of January 1, 2018, partnerships must either designate a representative for the tax year or opt-out of the new rules. The latter option is available for partnerships that have fewer than 100 partners, based on the number of K-1 forms issued by the organization each year. All partners must be either individuals, S or C corporations, estates of deceased partners, or foreign entities with C corporation election. If the business opts out, the IRS will assess each partner's tax on an individual basis.

Tax Assessment at the Partnership Level

Before the new legislation, the IRS collected any tax liability from individual partners. Now, if taxes are underpaid, the assessed balance will be collected from the partnership itself. This business entity has never before been required to pay federal income tax.

Underpayment for the tax year in question, referred to as the reviewed year, will be assessed and collected in the year in which the audit takes place (the adjustment year). This means that partners during the adjustment year — not those who were partners in the reviewed year — will bear the brunt of the economic tax burden. However, this burden can be reallocated in the partnership agreement.

Underpayment can be avoided if a partner files an amended return for the reviewed year and pays the past-due tax or if the company can prove that the underpayment can be allocated to a partner who has tax-exempt status or a C corporation. Partnerships can also transfer liability from the business to the partners with a push-out election. This requires a statement that reflects each historic partner's share of the audit adjustment.

Partnerships that plan to opt-out of the new laws should add a provision to their operating agreement limiting the transfer of partnership shares. This prevents the partnership from being unable to opt-out by taking on a partner who does not qualify, such as a flow-through tax entity like a limited liability company (LLC).

If you need help with establishing a tax matters partner for your partnership, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.