Designating a Partnership Representative

[Lee B]

"A partnership must designate a partnership representative on its tax return for each taxable year unless it makes a valid election out of the centralized partnership audit regime. The designation of a partnership representative for one taxable year is effective only for that taxable year. The partnership representative must have a substantial presence in the United States."

My situation makes me kinda nervous.

I have a Real Estate LLC client with 3 members filing a Form 1065.

Member A & B each own 40% and member C owns 20%.

A and B divorced last year and now they don't talk to each other.

C is their son and now he handles everything requiring communication between A and B.

Up to now the former spouse B handled all the financial stuff including signing the efile authorization every year.

I have obtained Authorization Letter signatures from all 3 members, but that still doesn't deal with designating

a Partnership Representative. I have looked at Form 8979, but it really doesn't address this situation.

Any helpful idea would be appreciated

Thanks In Advance

Lee

 

[kathyc2]

Couldn't you send an e-mail to all and tell them that they need to all agree who will be the Rep?  

I personally would disengage from this account as quickly as possible. If two of the partners can't be civil enough with each other to handle business, they will likely try to put you in the middle of things.  Not worth it IMO.

[Lion EA]

I told my own son and daughter-in-law to have their partnership prepared by someone else for 2022, because they are divorcing. I think I could do a better job, and could make sure my son's interests are protected, but I don't think I'm getting the full business story from DIL. So, I don't want to sign my name on their 1065. For that reason and similar reasons, I'm encouraging my son to file MFS, but my DIL is pushing for MFJ. If my son chooses to file MFJ with his estranged wife, I'm not sure if I'll be their preparer.

[Lee B]

This has been a Monthly Write Up/Payroll/Tax Returns client for 29 years. My annual fees are in the 5 digits.

I have already let them know,  that If I run into significant problems that they will have to find another accountant.

Since the divorce became final in November, I have been taking things step by step watching for any"red flags."

After giving it some thought, I have decided to ask all 3 members to sign a letter designating one of them to be the "Partnership Representative."

[Terry D EA]

Sad, but you have to do what you have to do. CYA at all costs. Not sure it is needed in this case but a conflict of interest waiver comes to mind.

[Lee B]

13 minutes ago, Terry D EA said:

Sad, but you have to do what you have to do. CYA at all costs. Not sure it is needed in this case but a conflict of interest waiver comes to mind.

I have thought about the "conflict of interest waiver " too.  Perhaps I need to call my Professional Liability Insurance carrier.

[jklcpa]

On 2/15/2023 at 6:13 PM, cbslee said:

A partnership must designate a partnership representative on its tax return for each taxable year unless it makes a valid election out of the centralized partnership audit regime

Might this partnership consider electing out, and therefore would not need to designate a representative?

This blog has a brief explanation of why a partnership may want to consider this, especially this one with A & B having divorced last year.  https://www.yeoandyeo.com/resource/why-an-eligible-partnership-should-elect-out-of-the-centralized-partnership-audit-regime

[Gail in Virginia]

That was interesting Judy.  But now I wonder why you would NOT want to elect out. 

[BulldogTom]

16 minutes ago, Gail in Virginia said:

That was interesting Judy.  But now I wonder why you would NOT want to elect out. 

I think it puts an audit target on the organization when you elect out.  This regime for partnership taxation is not taxpayer friendly.   It is designed to get the most income for the government at the lowest cost in time and effort.   Someone in our government believes that foreigners, crooks and terrorists are proliferating in partnerships and s-corps and they are determined to weed them out.   Enter the K2/K3.   Wait until those audits start coming down.

I could be all full of it on this one, but I think if you elect out, you will see more scrutiny.

Tom
Longview, TX   

 

[DANRVAN]

If you haven’t already done so, you need to inform your clients of the BBA audit rule implications.  Then let them decide whether to make the election or not.

 

Partnerships with trust as partners cannot make the election, but an election can be made if the partner is an estate of a deceased partner.

 

I prepared a generic letter that included the following:

 

For partnerships that elect out of the BBA audit rules, any IRS audits will be conducted at the individual partner level. Any resulting assessments will also be made at the individual partner level. 

 

If a partnership makes a valid election out, the applicable statute of limitation for assessment of tax will be determined at the partner level and is further determined separately for each partner. If the election out is not made, the applicable statute of limitation for assessment of tax is instead determined at the partnership level.

[DANRVAN]

23 hours ago, cbslee said:

ask all 3 members to sign a letter designating one of them to be the "Partnership Representative."

As an extra incentive, you can inform them that if they fail to designate a "PR",  the IRS can appoint one for them under reg 301.6223-1.

The PR does not have to be a partner.

[Lee B]

Thanks for all the feedback and good ideas.

On 2/16/2023 at 8:08 AM, cbslee said:

 

After giving it some thought, I have decided to ask all 3 members to sign a letter designating one of them to be the "Partnership Representative."

In this situation, I think this is my best way forward.

[Catherine]

If they really can't agree, have them put the three names in a hat and get a stranger to pull a name out. Seriously. 

[Lee B]

5 hours ago, Catherine said:

If they really can't agree, have them put the three names in a hat and get a stranger to pull a name out. Seriously. 

For years I have dealt B with whom I have a working relationship. I would prefer not to work with either A or C.

Therefore I gave B the Designation Letter and it's up to her to get A and C to sign it.

[DANRVAN]

2 hours ago, cbslee said:

For years I have dealt B with whom I have a working relationship. I would prefer not to work with either A or C

Hope that works out for you.

[Catherine]

One way or the other it will be resolved. Either she'll get the signatures, or you'll lose one client. At some point, it's poop or get off the pot.

[Lee B]

Well today, I received the Designation Letter signed by all 3 partners.

In addition, I picked up a related new LLC Form 1065 client

[Catherine]

Good luck!