(The Transfer Pricing Examination Process was recently updated by the Department of Treasury – June 2018. TaxConnections posts this valuable eight part a series to keep you informed of these changes.)

D. IRC Section 6662(e) Documentation Request
The Initial Transfer Pricing Documentation IDR (formerly known as the Mandatory Transfer Pricing IDR) is no longer required for all cases. Follow the Interim Instructions on Issuance of Mandatory Transfer Pricing IDR in LB&I Examinations. The Senior Revenue Agent/Team Coordinator and the issue team members will collaborate on the issuance of the IDR. It is important to issue the IDR early in the audit process to start working the issue as soon as possible to close the case timely. Please review IRM Exhibit 4.46.3-4 – Transfer Pricing Compliance Processes for specific language:

• Treas. Reg. Sec. 1.6662-6(d)(2)(iii) IDR includes a request for principal documents and an index for background documents
• Internal Revenue Code Section (IRC Sec.) 6662(e) and Treas. Reg. Sec. 1.6662- 6(d)(2)(iii) require that the taxpayer respond within 30 calendar days. The 30 days starts with the date of the IRC Sec. 6662(e) IDR
• The 30 day response time is defined by statute and is an exception to the new IDR and related enforcement processes as described in LB&I Directive on IDR Enforcement Process
• The issue team should use this 30 day period to perform analysis of currently available information, which may include prior tax returns and financial statements

Helpful References:
IRM Exhibit 4.46.3-4 – Transfer Pricing Compliance Processes
Interim Instructions on Issuance of Mandatory Transfer Pricing IDR in LB&I Examinations

E. Internal Planning Meeting(s)
The issue team will conduct internal planning meeting(s). General agenda items would include timeframes, key milestones, and topics specific to the transfer pricing examination:
• Discuss the initial risk analysis, preliminary audit steps, estimated audit timeline, and key milestone dates
• Discuss the accounting data and records that will be requested from the taxpayer, such as segmented profit and loss statements for specific product(s) or product line(s)
• Discuss the IDR process (formulation of questions, taxpayer input, response times, and dealing with delays)

Best Practice: Various planning meetings and informal discussions may be held depending on the complexity and size of the return, the planned scope of the examination, and the resource commitments required.

Helpful References:
IRM 4.46.3.3 – Internal Planning and Internal Planning Discussions
IRM Exhibit 4.46.3-2 – Sample Agenda Topics for Internal Planning Meeting(s)

F. Issue Team Examination Plan, Timelines, and Key
Milestones
The issue team will establish an estimated audit timeline with key milestone dates for completion of the transfer pricing examination:

• Coordinate with the Team Coordinator and Case Manager regarding the timeline
• Complete the examination plan after the opening conference
• Include a date for the mid-cycle risk analysis. Provide the taxpayer with the examination plan, timeline, and initial risk analysis
• Input detailed transfer pricing specific Uniform Issue Listing (UIL) codes in Issue Management System (IMS)

Best Practice: Refer to Exhibits B and C for general timelines that could apply to a transfer pricing case. The examination timeline exhibits should only be used as guides.

Each case has its own unique characteristics. The examination plan timeline should be specific for each case.

Helpful References:
IRM 4.46.3 – Planning the Examination
Treaty & Transfer Pricing UIL Codes

G. Opening Conference
The issue team will participate in the formal opening conference with the taxpayer. Agenda topics specific to the transfer pricing examination should include:

• LEP and the three key phases of the process: Planning, Execution, and Resolution (Publication 5125)
• Transfer Pricing Examination Process – ensure that the taxpayer is given appropriate information to allow it to access the most current document on IRS.gov and discuss it to facilitate understanding
• IRM Exhibit 4.46.3-4 – Transfer Pricing Compliance Processes provides references, documentation, audit planning, and IRC Sec. 6662(e) penalties
• Preliminary scope of the transfer pricing examination and general timelines
• Discuss IDR and related enforcement processes as described in LB&I Directive on IDR Enforcement Process
• Discuss IRM 4.46.3.6 – LB&I Claims Process regarding claims for refund. IRM Exhibits 4.46.3-7 – LB&I Guidelines for Reviewing Claims and IRM Exhibit 4.46.3- Risk Assessing Claim Issue(s) illustrate the processes for reviewing and risk assessing claims. A claim could have an indirect or direct impact on potential
issues. Claims could also change audit plans. Potential issues may need reevaluation due to claims
• Discuss the expectation for financial statement orientation meetings to be held, ideally, within 30 days of the opening conference:
– Identify employees responsible for the accounting records
– Include segmented financial statements and records
– Consider whether a CAS is available to attend the meeting
• IRM 4.46.3.7 – Issue Discussion Meetings:
– Discuss the benefits of issue discussion meetings
– Discuss the roles and responsibilities of the issue team and the taxpayer
– Share the initial risk analysis and preliminary working hypothesis with the
taxpayer
– Work with the taxpayer to establish initial audit steps
• Develop a timeline for the issue
• Discuss that transfer pricing examinations may take longer than other issues to examine and a statute extension may be requested during the examination
• Discuss the impact to the timeline if the taxpayer fails to meet deadlines for IDRs or if the taxpayer fails to be transparent about facts and positions
• Identify the taxpayer personnel that will work with the issue team
• Discuss the need to schedule the transfer pricing/supply chain orientation after the financial statement orientation:
– Request that employees involved in the planning and structuring of transactions be available
– Request that personnel responsible for the transfer pricing study be available
– Emphasize expectations that the transfer pricing orientation should be a comprehensive presentation that should cover business operations, key functions, worldwide structure, title flow, product flow, service flows, and transfer pricing policies
• Discuss the quality of responses received to date
• Discuss the potential need for interviews and site visits, if known
• Anticipate the additional information needs, order, and priority
• Discuss the NOPA, Economist Report, and issue resolution processes
• Discuss the IRC Sec. 6038A rules and procedures governing foreign-based documentation, if applicable. It may be necessary to obtain an authorization of agent for U.S. subsidiaries of foreign parents
• Discuss IRM 4.60.2 – International Procedures – Mutual Agreement Procedures and Report Guidelines to notify the taxpayer regarding statute of limitation protections on foreign affiliates’ returns
• Issue Pattern Letter 1853(P) to allow the taxpayer to protect its foreign statute of limitations. Indicate countries of origin to be determined and amounts to be determined. This is notification to the taxpayer of potential double taxation

Helpful References:
IRM 4.46.3.5 – Opening Conference (Meeting)
Exhibit 4.46.3-3 – Sample Agenda for Opening Conference (Meeting)
IRM 4.46.5.4 – Issue Resolution Tools

Best Practices: The issue team will conduct weekly or bi-weekly discussions with the taxpayer to support communication and ensure common expectations regarding the audit progress, IDRs, and timelines.

(This Is Part III of VIII On Department of Treasury- Transfer Pricing Examination Process And Updates. Click To Part II,  Click To Part IV)