You are at a critical stage of the audit. You have many options depending on your facts, but as a general matter the first step would be to sort through the realistic possibilities of resolving a dispute with the Exam team. This requires an understanding of the dynamics within the Exam team and its priorities, and the type of tranfer pricing (and other) issues in question (e.g., whether the matter involves tiered or non-tiered, recurring or non-recurring, permanent or timing difference issues). It also requires an understanding of when and how to escalate the matter within the IRS. The IRS recognizes that it has been bogged down pursuing weaker cases, and we are finding IRS managers to be more open to settlement negotiations even at the Exam stage when the facts are properly positioned with the regulatory requirements.

Second, you may want to consider whether there are affirmative set-off claims you can raise to offset the proposed adjustment. This is a fact-specific exercise to see if there are transfer pricing adjustments that would run to your benefit. Note that there are time-sensitive procedural rules for making set off claims that must be followed.

When closing a transfer pricing examination, you should also bear in mind that correlative adjustments can affect the taxable income of related U.S. and foreign taxpayers, such as by impacting the determination of Subpart F income. Pursuant to Rev. Proc. 99-32, transfer pricing adjustments can also take the form of an interest-bearing account receivable or payable to or from a taxpayer from or to a related person. Taxpayers can also offset accounts by any bona fide debt or distribution from the foreign related party.

If you cannot settle with Exam, you can pay the tax and sue for a refund, but in many cases it is better to petition for reconsideration by IRS Appeals. In recent experience, taxpayers who can present strong defenses continue to perform favorably at this stage of the administrative process.

These are just general observations -- typically in transfer pricing disputes, the facts are king.

IRS CIRCULAR 230 NOTICE. Any tax advice expressed above was not intended or written to be used, and cannot be used, by any taxpayer to avoid U.S. federal tax penalties. If such advice was written or used to support the promotion or marketing of the matter addressed above, then each offeree should seek advice from an independent tax advisor.