Do You Have a TEFRA Partnership

TEFRA (named after the Tax Equity and Fiscal Responsibility Act) deals with larger partnerships. If you have a partnership that is a TEFRA partnership, you need to appoint a Tax Matters Partner and the partnership will fall under the "strange" TEFRA audit rules
** Note - If you do not have a TEFRA partnership, you do not appoint a Tax Matters Partner.
The Internal Revenue Code calls a non-TEFRA partnership, a small partnership. This means the partnership has less than 11 partners. If at any time during the year, the partnership has more than 10 partners, then the partnership is a TEFRA partnership.
If the partnership has 10 or fewer partners, it can still be a TEFRA partnership if any of the following are partners:

• Partnership;
• Limited liability Company (LLC) which files a Form 1065 or is treated as a disregarded entity (see Revenue Ruling 2004-88) for federal tax purposes;
• Trust (any type, including Grantor Trusts and grantor type trusts, even if the Schedule K-1 contains the SSN of the grantor);
• Nominee;
• Nonresident alien individual; or
• S corporation.

If the partnership has 10 or fewer partners, and does not have any of the above as a partner, it is a small partnership unless it filed Form 8893 to elect to be treated as a TEFRA partnership. This form, if filed, should become part of your client's permanent file.

We will go into the more complicated TEFRA audit rules later. Keep in mind, TEFRA is going away in two years, but the determination of if a partnership is a small partnership will still matter for the new partnership audit rules.

Relevant Citations:

Partnership Audit Technique Guide

Form 8893