Disparity over tax signatures
Tax law, IRS regulations don’t always agree on whose John Henry needs to go on partnership filings
Iwant to call your attention to something that many people treat as an afterthought when preparing their tax returns — the signature placed on that return.
A tax return is an attested document. You sign, under penalties of perjury, that you have examined the return and, to the best of your knowledge, it is a complete and accurate return.
Failure to sign a tax return means the return was never filed, leaving open the statute of limitations on assessment and subjecting the taxpayer to penalties for late filing.
Each taxpayer must sign his or her own return because it is their attestation that they have reviewed the contents and know of no errors or omissions on the return. Obviously, no one else can make such a statement about another’s tax return.
Surprisingly, and sometimes unfortunately, it is less obvious who can make such an attestation on a return filed by a partnership.
Partnerships file Form 1065 to report their income and deductions. This form includes a schedule K-1 that is provided to each partner reporting his share of the income and deductions.
The partners are the ones who pay tax on any income of a partnership. The partnership is just an information reporting entity. It must provide information to the IRS by filing a Form 1065.
Partnership tax filings have grown significantly, in large part due to the growth of limited liability companies. If an LLC has at least two owners, the tax law treats it as a partnership unless the owners affirmatively elect to instead treat it as a corporation.
Like an individual, a partnership must file a signed tax return. Logically, given the purpose of the signature, the return should be signed by someone who has knowledge of the information reported on the return.
Partnerships are generally very informal business or investment entities, often with few owners. The latest IRS SOI data shows the average number of partners in a partnership is between four and five.
With a small number of owners, it may be reasonable to assume that each owner would have enough knowledge of the partnership’s business to be able to attest to the information reported on the tax return. For this reason, the statutory tax law says that any partner may sign the return. The applicable regulations say the same thing.
IRS does not follow this broad grant of authority. The Form 1065 says that the return must be signed by a general partner or a member-manager of an LLC. By the statement on the tax return itself, IRS does not allow limited partners or LLC members who are not designated as managers to sign the return.
IRS Publication 3402 says the same thing, as does a 2014 IRS Internal Legal Memorandum. The IRS logic seems to be that a limited partner or a non-managing LLC member lacks the required knowledge to attest to the tax return information.
This need not be true. In fact, some LLCs have a manager who is not even a member. That manager may be the only party with the requisite knowledge to sign the attestation statement.
There is no guidance as to who signs when the general partner or LLC manager is itself an entity (that is, the IRS says the entity should sign, but not who should sign on behalf of the entity).
This may seem trivial. It’s just a signature. But if the return is signed by a person who lacks the authority to sign, the return has not been filed. The statute of limitations for assessment remains open and the partnership may be penalized $195 per partner, per month, that the return is delinquent.
Depending on the document, the statutory law, the regulations, IRS Publications and IRS forms provide a different answer as to who can sign. The American Institute of CPAs and the American Bar Association have asked for clarification on this simple issue.
Partnerships are growing in use and in importance, largely due to the propensity to view an LLC as a substitute for a corporate entity.
Complicated business transactions will always have complicated tax laws that apply to them. But we should at least know who has to sign the partnership’s tax return.