For income tax purposes, partnerships are not taxable entities. Rather, they are treated as conduits, in which the items of partnership income, deduction and credit are allocated among the partners for inclusion in their respective income tax returns.
Before 1982, the IRS audited partnerships at the partner level, with any adjustments made to each partners return. This process was unwieldy and complicatedaudits of items on a partnership return required separate proceedings for each partner; settlement agreements or determinations for items were binding only on the partner examined; and when the IRS thought it necessary to extend the limitations period for a partnership item, the service had to obtain every partners consent. And as partnership syndications developed and grew, these problems only got worse.
To address these problems, in 1982 Congress enacted a series of provisions providing that the tax treatment of partnership items would be determined at the partnership level for most partnerships with more than 10 partners.
THE TMPs ROLE
Under those provisions, a partnership being audited must delegate someone to act as its official representative in IRS matters (the tax matters partner [TMP]). The provisions also apply to other entities that are taxed as partnerships (for example, certain limited liability companies); such entities also may be subject to these rules and thus may need to designate TMPs. Note, however, that these rules do not apply to S corporations.
In general, a TMPs duties include providing notice of an audit to partners; negotiating settlement agreements; extending the statute of limitations for the partnership and the partners; and determining the forum for judicial review. The TMP also is responsible for conducting the audit in an efficient manner, as well as providing the partners (or members) with current information on the proceedings so they can decide whether to participate.
DESIGNATING THE TMP
The partnership usually designates who is to speak on its behalf; if it is not done specifically, the IRS determines who will be the TMP.
Generally, if the partnership fails to designate a TMP properly, the position will fall to the general partner with the largest profits interest in the partnership at the close of the tax year involved. If there is more than one such partner, the TMP will be the partner whose name appears first alphabetically.
Duration of designation. A partnerships TMP designation is effective for only one tax year. However, the original designation can be made (in the partnership agreement) for a period of more than one year (that is, it can remain effective until changed).
RESPONSIBILITIES AND OBLIGATIONS
The TMP receives all notices and must keep each partner informed of all proceedings (both judicial and administrative) dealing with partnership item adjustments. He or she is the IRSs contact in acquiring access to the partnerships books and records and is responsible for choosing the forum in which to litigate (if necessary).
Basically, the TMP has to update both sides (the partners and the IRS) as well as other partnership representatives about various matterssuch as proposed audit adjustments, audit closing conference schedules, administrative appeal procedures (including when and where they will take place), IRS acceptance of any settlement offers and consents to extensions of the applicable limitations period for partnership items or filing of requests for review of IRS findings. At the same time, the TMP must furnish the IRS with a list of the names, addresses, profits interests and identification numbers of all partners in the partnership during the tax year. (If the TMP later determines this information to be incomplete or incorrect, he or she must furnish corrected or additional information to the IRS.)
For a detailed discussion of tax matters partners, see The Responsibilities and Obligations of the Tax Matters Partner, by Larry Garrison, in the June 1998 issue of The Tax Adviser .
Nicholas Fiore , editor
The Tax Adviser