(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.)
The Transfer Pricing Examination Process provides a guide to best practices and processes to assist with the planning, execution and resolution of transfer pricing examinations consistent with the Large Business & International (LB&I) Examination Process (LEP), Publication 5125. This guide will be shared with taxpayers at the start of a transfer pricing examination so they understand the process and can work effectively with the examination team.
Transfer pricing examinations are factually intensive and require a thorough analysis of functions, assets, and risks along with an accurate understanding of relevant financial information. They are resource intensive for both the IRS and taxpayers. To ensure
resources are applied effectively, LB&I is using data analytics to identify issues for examination that have the most significant risk for non-compliance. In addition, teams should continually assess the merits of issues during an examination.
Our goal in a transfer pricing examination is to determine an arm’s length result under the facts and circumstances of the case. Teams should keep an open mind during an examination to new facts as they are identified. Arm’s length results are rarely a precise answer, but instead may be a range of results. If the facts of the case show that the taxpayer’s results fall within an appropriate arm’s length range, then our resources should be applied elsewhere. Likewise, teams should continually assess opportunities for issue resolution with taxpayers during the examination process.
The Transfer Pricing Examination Process provides a framework and guide for transfer pricing examinations. Every transfer pricing issue is unique, and teams should exercise their judgment on how to best apply this guide. This guide will be updated regularly
based on feedback from examiners, taxpayers, practitioners, and others.
I. Planning Phase
This phase of the examination process determines the scope of the audit. Issues selected for examination should have the broadest impact on achieving compliance regardless of the size or type of entity. The examination team will work with the taxpayer to establish a plan to complete the examination in a timely manner. The examination plan will be issue-focused and contain the following: issues identified, audit steps, timeline(s), and communication agreements. The examination plan may be adjusted
throughout the examination process. Both parties must commit sufficient resources to achieve the agreed-upon case and issue timelines.
A. Issue Team Member Collaboration and Coordination
The Issue Selection and Collaboration Process will be used to determine if a specialistis assigned to an Industry Case. The team assigned to examine a specific issue, such as a transfer pricing transaction, is referred to as the issue team. For transfer pricing
cases, the issue team can be composed of various individuals, including members of the Transfer Pricing Practice (TPP) and Cross Border Activities (CBA); such as the:
• Senior Revenue Agent
• Revenue Agent (RA)
• Tax Law Specialist (TLS)
In accordance with the LEP, there should be coordination and collaboration among the team members and advisors including the:
• Case Manager
• Issue Manager
• Team Coordinator
• Senior Revenue Agent and/or the Revenue Agent responsible for international issues
• Computer Audit Specialist (CAS)
• Other specialists
The issue team should coordinate to issue an Information Document Request (IDR) requesting accounting records, including geographic, tax and legal organizational charts, worldwide geographic and initial segmented accounting data, and financial statements necessary for transfer pricing review.
• The roles and responsibilities for each issue team member assigned will be determined in the planning phase based on the resources available
• Involve LB&I Division Counsel early in the examination process
• The issue team should coordinate IDR requests with the entire case team to avoid duplicate IDR requests.
IRM 4.46.3 – Planning the Examination
IRM 4.60.6 – International Referral Criteria & Procedures
Revenue Agent Case Quality Improvement Job Aid
Memorandum of Understanding Between Internal Revenue Service Large Business & International (“LB&I”) and National Treasury Employees Union concerning process for specialist referrals
B. Practice Units
Practice Units are reference and training tools for evaluating and developing potential issues encountered over the Planning, Execution, and Resolution phases of an examination. Practice Units are located on the “International Knowledge Base” site under the Tax Examination/Issues portion of the IRS Virtual Library on the Servicewide Knowledge Management (KM) SharePoint site.
Following are some examples of Practice Units that can be used to assist with the Planning Phase:
• Arm’s Length Standard
• Overview of IRC Section 482
• Three Requirements of IRC 482
Best Practice: Check for Directives or other forms of guidance affecting transfer pricing issues.
(This Is Part I of VIII On Department of Treasury- Transfer Pricing Examination Process And Updates. Go To Part II)
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