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Solution for Canadian/Foreign designated partnership representative failing USA telephone and 183 day tests

IRC Section 6221(b) centralized partnership audit regime requires a designated partnership representative with substantial presence in the United States possessing a USA address, USA TIN and USA telephone number.

 

Could a Canadian partner in a US partnership (say, one that holds USA real properties with USA addresses) qualify to designate him/herself using a Canadian telephone (or Google account) number (if such person possess a TIN)?

 

Could a Canadian partner in a US partnership (say, one that holds USA real properties with USA addresses) qualify to designate him/herself as having substantial presence in the United States despite not meeting substantial presence in the United States as described in section 7701(b)(3) to determine whether an alien individual should be treated as a resident alien for U.S. tax purposes?

 

Noted that in a computer automated online IRS process requiring a USA telephone number, such as its online or taxpros transcript system, practically, a Canadian number won’t work due to programmed input restrictions. But, what about a non-automated system such as a 1065 return filing (albeit e-filed)?

 

The criteria language state that a USA telephone number must be used. But, what’s interesting is the reason given for that requirement is so that “the partnership representative can be reached by United States telephone during normal business hours in the United States”, which logically should extend to a Canadian telephone number or even to a number issued via a Google account.

 

A reconciliation of a Canadian NRA being a foreign partner yet having substantial presence in the United States (despite not having substantial presence in the United States as described in section 7701(b)(3) to determine whether an alien individual should be treated as a resident alien for U.S. tax purposes) can be due to the different standard and definition of  “substantial presence in the United States” for these two separate laws.

 

Proposed § 301.6223–1(b)(2) provides that the partnership representative must have a substantial presence in the United States. Proposed § 301.6223–1(b)(2)(i) provides that a person has a substantial presence in the United States for the purposes of section 6223 if three criteria are met. First, the person must be able to meet in person with the IRS in the United States at a reasonable time and place as is necessary and appropriate as determined by the IRS. Second, the partnership representative must have a street address in the United States and a telephone number with a United States area code where the partnership representative can be reached by United States mail and telephone during normal business hours in the United States. Third, the partnership representative must have a U.S. TIN.

 

The proposed regulations do not use the substantial presence test as described in section 7701(b)(3) (substantial presence test*) because the purpose of the substantial presence test is to determine whether an alien individual should be treated as a resident alien for U.S. tax purposes. In contrast, the purpose of requiring that the partnership representative have a substantial presence in the United States is to ensure ease of communication so the audit process can proceed smoothly**. As a result, proposed § 301.6223–1(b)(2) does not adopt the substantial presence test in section 7701(b)(3).

 

*Under separate tax law for determining US residency, there is a numerical test of days spent in the USA over the past three years and if meeting ‘substantial presence’ under those laws, such taxpayer partner in US partnership would (i) file a 1040 with IRS as a resident (ii) may need to file a state tax return (iii) would likely list USA address on Schedule K-1 and (iv) likely would not be a foreign partner and not subject to foreign partner withholding, nor would the partnership disclose that partner as contributing toward the aggregate foreign partner count.

 

**IRS says: the partnership representative must have a substantial presence in the United States. This requirement is intended to ensure that the person selected to represent the partnership will be available to the IRS in the United States when the IRS seeks to communicate or meet with the representative. 

 

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