Transfer Pricing: Audits, Appeals, and Penalties (Portfolio 6924)

George Soba

Principal, Tax / Transfer Pricing

Deloitte Tax LLP

Cynthia K. Hustad

Cynthia Hustad

Director (Retired)

Deloitte Tax LLP

At a glance

I. Introduction

A. Increased IRS Focus on Transfer Pricing Examinations and Adjustments

B. Overview of IRS Transfer Pricing Audit Process

C. Effect of the Transfer Pricing Penalty Documentation Requirements

II. Field Audit: Preparation

A. Authority to Conduct a Transfer Pricing Audit

B. Selection of Taxpayers for Transfer Pricing Audits

C. The Coordinated Industry Cases Program and Its Changes

D. Resources Available to IRS in Examinations

E. LB&I Examination Process – Planning Phase

F. Transfer Pricing Examination Process

G. Rules of Engagement for Transfer Pricing Issues

H. Taxpayer's Pre-Audit Strategy

I. Opening Conference

J. Examination Plan

III. Field Audit: Information Gathering and Analysis

A. Information Document Requests

B. Requests for Documents from Third Parties

C. Formal Document Requests

D. Document Retention and Production under §6038A and §6038C

E. Designated Summonses

F. IRS Use of Competent Authority Procedures during Examination: Treaty-Based Information Sources

G. IRS Priority of Information-Gathering Procedures

IV. Field Audit: Examination and Assessment

A. Extending the Statute of Limitations

B. Examination Process

C. Taxpayer Strategies for Settlement at the Examination Level

D. Fast Track Settlement Program

E. Appeals Early Referral Procedures

F. Accelerated Issue Resolution (AIR) Agreements

G. Revenue Agent's Report and the 30-Day Letter

H. The 90-Day Letter

V. Appeals

A. Strategic Considerations

B. Appeals Settlement Practices

C. Simultaneous Appeals/Competent Authority Consideration

D. Post-Appeals Mediation of Nondocketed Cases

E. Coordination of Dispute Resolution Procedures

F. Documentation of Settlement

G. Prepayment Appeals of Reporting Penalties

VI. Case Study

A. Facts

B. Maker's Transfer Pricing Practices

C. Audit of 2011 and 2012 Taxable Years

VII. Related Issues

A. Collateral Adjustments

B. Blocked Income

VIII. Penalties Relevant to §482 Adjustments

A. Accuracy-Related Penalties; Overview

B. Transfer Pricing Penalties in Detail

C. Substantial Understatements of Income Tax

D. Negligence or Disregard of Rules and Regulations

E. Fraud Penalty

F. Strategies


Transfer Pricing: Audits, Appeals, and Penalties (Portfolio 6924) discusses the effect on taxpayers of various IRS enforcement programs. The Portfolio also describes in detail the operation of field audits and review by the Appeals Office, and illustrates taxpayer strategies for dealing with the IRS in those contexts. It also discusses the penalties associated with §482 adjustments.


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