Does US Partnership Representative affect your firm?

      Through enactment of legislation which came into effect for tax years beginning 1 January 2018, the United States IRS has streamlined the partnership audit and collection process. The new rules apply to an entity electing to be treated as a partnership for income tax purposes. U.S. Partnership Representative (PR) replaces Tax Matters Partner (TMP).

      What is the filing deadline?

      The filing deadline for the IRS Form 1065 is the 15th day of the 3rd month after the end of the tax year for the return. For calendar year end filers this year’s deadline will be 15 March 2023.

      However, it is very common for funds/partnerships to file an extension through filing of IRS From 7004 before midnight local time on the normal due date of the return. The Form 1065 – Partnership Extension Form 7004 is for a 6 month extension. For a calendar year return, a Form 1065 on a timely filed extension would become due on 15 September 2023.

      Please discuss the timing of your filings with your tax advisor. With its years of experience, Waystone has streamlined the onboarding process and can accommodate services in as quick as 2-3 days, however, it would be highly recommended to engage a service provider as early as possible. Waystone’s service fees are per filing year.

      Who should be thinking about the US Partnership Representative Filing?

      Given their knowledge and experience with your funds, your tax advisor would be ideally suited to advise you if a IRS Form 1065 filing is required for your fund(s) for the 2022 year end and as such if you require a Partnership Representative.

      However, we have set out below some key scenarios for considerations that may require your fund to file an IRS Form 1065:

      • launched a Cayman onshore/offshore Master-Feeder structure in 2022
      • non-US-based investment managers launched a US domiciled fund in 2022
      • investment managers who have historically appointed the role to internal resources, however, are looking to outsource the responsibilities to an external service provider
      • institutional managers looking to create independence through outsourcing the role to an independent firm/individual
      • existing funds that have generated Effectively Connected Income (ECI) or income derived from sources in the United States for the first time in 2022.

      Requirements of a partnership representative

      The Partnership Representative must be named on the partnership tax return via IRS Form 1065. The Partnership Representative must also have a substantial presence in the United States. A substantial presence requires the Partnership Representative to have:

      • a US taxpayer identification number
      • a US telephone number and a US street address
      • be available to meet in person with the IRS at a reasonable time and place
      • if the Partnership Representative is an entity, the partnership must appoint an individual who meets the substantial presence requirements to act as the “designated individual” of the entity serving as Partnership Representative.

      Challenges in not appointing a partnership representative

      If a partnership does not appoint its own partnership representative (“PR”), the IRS can select any person to serve as PR with the power to bind the partnership and all its partners.

      Although there is no strict technical requirement in the Regulations that a PR be a US citizen, as a practical matter this is a reality because it can be challenging for a non-US citizen to obtain a TIN number.

      Strict eligibility requirements to elect out

      There are strict eligibility requirements to opt out of the new regime, which includes the number and type of partners in a partnership and notification requirements to each partner. Virtually all hedge and private equity partnerships will not be eligible to elect out of the new audit rules due to not meeting the eligible partner requirement. Should the fund be eligible to elect out, this election must be made in a timely filed tax return. Partnerships should carefully consider the eligibility requirements with their tax advisor to determine the viability of opting out of the new regime.

      The Waystone Partnership Representative solution

      Waystone provides a comprehensive, competent and qualified US Partnership Representative solution that meets all IRS requirements and protects the interests of the partnership. Accordingly, the PR and the Designated Individual acting on behalf of the Waystone Entity Partnership Representative shall not, without the prior written approval of the General Partner:

      • engage advisors
      • schedule or attend meetings or conference calls with the IRS or advisors, unless additionally attended by the General Partner or such advisors as the General Partner shall appoint
      • file requests, protests, court filings, settlements, or other documents with the IRS or courts
      • propose, consent to or otherwise enter into any material agreements with the IRS (including waivers or extensions of statutes of limitations and settlement agreements)
      • make any election on behalf of the Partners or Partnership.

      If you have any questions about this requirement and how it may affect your business, please reach out to your usual Waystone representative or contact us below.

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