Tax matters person: Overview, definition, and example
What is a tax matters person?
A tax matters person (TMP) is an individual or entity designated to represent a partnership or other business entity in all tax-related matters. The TMP is responsible for handling communications with the tax authorities, making decisions on behalf of the partnership or business entity regarding tax filings, audits, and disputes. The role of a tax matters person is essential in ensuring that the entity complies with tax laws and regulations and that any issues arising from tax filings or audits are addressed efficiently.
In some jurisdictions, particularly in the U.S., the TMP is usually appointed under the rules governing partnerships or other pass-through entities, where the income, deductions, and credits pass through to the individual partners or members. The TMP has the authority to act on behalf of the entity in dealings with the Internal Revenue Service (IRS) or other relevant tax authorities.
Why is a tax matters person important?
The tax matters person is important because they streamline the process of managing tax compliance for an entity. Without a designated individual or entity responsible for handling tax matters, there could be confusion or delays in responding to tax inquiries or fulfilling tax obligations.
For partnerships and businesses, having a tax matters person ensures that tax-related decisions are made by someone who is knowledgeable and authorized to act on behalf of the business, preventing issues that could arise from miscommunication or mismanagement of tax affairs. The TMP is also key in ensuring that tax audits or disputes are handled properly and in compliance with applicable tax laws.
The role of the tax matters person helps avoid penalties, fines, or complications during tax audits by providing a designated point of contact for tax authorities. Additionally, they ensure that all partners or members are properly informed and that decisions affecting the entity’s taxes are made with transparency.
Understanding a tax matters person through an example
Consider a partnership, ABC Investments, which consists of several partners. The partnership is required to file tax returns and handle its tax obligations as a pass-through entity, meaning the individual partners are responsible for reporting their share of the partnership’s income or losses.
To simplify the process, ABC Investments designates one of the partners, John, as the tax matters person. John is responsible for ensuring that all tax returns are filed on time, representing the partnership in the event of an audit by the IRS, and making decisions about how to handle any tax-related disputes. If the IRS contacts the partnership for an audit, John is the person who communicates with the IRS, provides any necessary documentation, and makes decisions on behalf of the partnership regarding the audit.
If the IRS proposes a change in the partnership’s tax liability, John will review the proposed adjustments and decide whether to accept, challenge, or negotiate the changes, acting as the official representative of the partnership.
Example of a tax matters person clause
Here’s how a tax matters person clause might appear in a partnership or operating agreement:
“The Partners hereby designate [Partner Name] as the Tax Matters Person (TMP) for the Partnership. The TMP shall have full authority to act on behalf of the Partnership in all tax matters, including but not limited to filing tax returns, handling audits or disputes with tax authorities, and making decisions regarding tax elections. The TMP is authorized to represent the Partnership before the Internal Revenue Service (IRS) or other applicable tax authorities and shall keep all Partners informed of significant tax matters affecting the Partnership.”
Conclusion
The tax matters person plays a critical role in ensuring that an entity or partnership meets its tax obligations in an organized and efficient manner. By designating a TMP, businesses can ensure that tax-related decisions are made by an authorized and knowledgeable individual, reducing the risk of miscommunication or non-compliance with tax laws. The TMP handles all tax communications, audits, and disputes, ensuring the entity operates smoothly and avoids potential legal or financial complications related to taxes. For entities with multiple partners or members, having a clear designation of the tax matters person can streamline the process of managing tax responsibilities and facilitate compliance with tax laws.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.