Partnership Representative vs. Tax Matters Partner: What Your Operating Agreement Should Include

Your operating agreement needs to designate someone to represent the partnership in an IRS audit. Depending on which audit rules your partnership falls under, that person is either a partnership representative or a tax matters partner. The two roles carry different levels of authority, and the operating agreement language should reflect which one applies.

Two Sets of Rules: TEFRA/BBA and CPAR

Partnership audits are governed by two different regimes.

TEFRA (older rules). Under the Tax Equity and Fiscal Responsibility Act rules, the IRS audited partnerships but assessed tax at the individual partner level. The tax matters partner coordinated the audit process, but each partner was responsible for their own share of any adjustment.

Centralized Partnership Audit Regime (CPAR). Starting with tax years beginning after 2017, the default audit rules changed. Under CPAR, the IRS can assess and collect tax at the partnership level. The partnership representative has sole authority to act on behalf of the partnership in an audit. They can bind all partners to the outcome without needing partner consent.

The difference in authority is significant. A tax matters partner coordinated. A partnership representative decides.

Can You Still Elect the Old Rules?

Some partnerships can elect out of CPAR and use the older partner-level audit process. The election is available to partnerships that meet certain requirements, including having 100 or fewer partners and having only certain types of partners (individuals, C corporations, S corporations, estates of deceased partners). The election is made annually on the partnership's tax return.

If your partnership qualifies and makes this election, the audit process works more like the old TEFRA system, with adjustments flowing to individual partners. The operating agreement should address whether the partnership intends to make this election each year.

What Should the Operating Agreement Say?

Regardless of which regime applies, the operating agreement should address several things.

Designation. The agreement should name the partnership representative (or tax matters partner, if electing out of CPAR) and specify how the person is selected. Under CPAR, the partnership representative does not have to be a partner. It can be any individual or entity with a substantial presence in the United States.

Authority and limitations. Under CPAR, the partnership representative has broad authority by default. The operating agreement is where partners can add internal guardrails. For example, requiring the representative to notify partners before settling an audit or requiring a vote before accepting certain adjustments.

Push-out election. Under CPAR, the partnership representative can make a "push-out" election that passes tax adjustments through to the individual partners who were there in the reviewed year, rather than assessing tax at the partnership level. The operating agreement should address whether and when this election should be made.

Removal and replacement. The agreement should specify how to replace the designated person if they resign, become incapacitated, or are no longer serving the best interests of the partnership.

What If the Operating Agreement Is Silent?

If the operating agreement does not designate a partnership representative, the IRS will designate one. That person would have full authority to act on the partnership's behalf with no internal constraints from the agreement.

Even agreements that do name a partnership representative often lack the guardrail provisions. The designation alone is a starting point. The operating agreement should also define the scope of authority and the process for key decisions during an audit.

The Taxes and Operating Agreements overview covers the full range of tax provisions your agreement needs to address, including audit representation. The Top 10 Items to Review covers this as a commonly missing provision.

This post is educational and does not constitute tax or legal advice. Consult your CPA or tax advisor for guidance specific to your situation.

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