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March 20, 2014

Navigating the Transfer Pricing Audit Roadmap

Last month, the IRS Transfer Pricing Operations (TPO) team issued a Transfer Pricing Audit Roadmap. The roadmap is intended to assist IRS examination teams with developing and auditing transfer pricing issues.

Audit cycles will depend upon the complexity involved with issues under examination, but the IRS has developed a 24-month timeline to guide the process from fact finding to resolution. Examiners will be utilizing Forms 5471, 5472, 8833, 8858, 8865, 926, UTPs and schedule M-3 to perform initial analysis, issue identification, and risk assessment.

With the pragmatic revenue raising goals involved with transfer pricing audits, the TPO is focused on developing high risk issues around intangibles, hybrid instruments, and other perceived income shifting transactions. Also, taxpayers' worldwide effective tax rates and risk based assessments based on industry profitability ratios will be used to identify and select transfer pricing audit targets.

Transfer pricing is an area of risk quickly escalating beyond just tax and finance departments as executives are increasingly recognizing the significant financial risks, controversy risks, and reputational risks that must be strategically assessed and mitigated. Quality transfer pricing documentation provides the taxpayer the opportunity to tell a “compelling story” to the IRS and may provide protection from penalties if prepared contemporaneously.

Even with transfer pricing documentation in hand, taxpayers should be prepared for examiners to request increasing amounts of background documentation and source information, including:

  • Intercompany agreements
  • Financial and accounting data
  • Employee details
  • Entity structure information

The transfer pricing audit roadmap is one more step in the increasing focus the IRS is placing on transfer pricing, coinciding with mounting foreign country focus on transfer pricing. Countries are increasingly prioritizing transfer pricing enforcement as a necessary tax base defense and probable revenue raiser. Media attention is bringing transfer pricing risk into the forefront for multinational executives, and global initiatives such as the OECD Base Erosion & Profit Shifting (BEPS) project reflect the global appetite for transparency and corporate responsibility.

If you have further questions about the Transfer Pricing Audit Roadmap, contact Josh Finfrock at jfinfrock@cbiz.com or 901.685.5575.    

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