Kinds of agreements tax authorities make
Related companies that trade with each other across borders can seek an advance pricing agreement with the IRS, sometimes negotiated alongside a foreign tax authority, which sets the method for pricing transactions between related companies for future years. A closing agreement is a written settlement with the IRS that fixes the tax treatment of a particular matter and is generally binding on both sides. States use voluntary disclosure agreements to bring businesses into compliance for past periods, often with a limit on how far back the state looks. Each of these resolves uncertainty, and each also commits you to terms you will have to live with.
What goes into the application
These agreements depend on detailed factual submissions. For transfer pricing, that typically means intercompany agreements, financial data by entity, descriptions of what each company actually does, and economic analysis supporting the proposed method. A state disclosure usually calls for sales data by state, an account of when activity in the state began, and an accurate picture of tax collected but not remitted. Information provided while negotiating can sometimes be used by the authority even if no agreement is reached, so the decision to approach them should come before the materials are assembled, not after. Keep board approvals, prior returns, and any earlier correspondence with the agency.
Weighing whether an agreement fits
The question is not only whether an agreement is available but whether the certainty is worth the cost and the commitment. Early on we look at the size of the exposure, how predictable the business will be over the agreement's term, and whether an anonymous or preliminary approach is possible before you identify yourself. We also consider the international side, since an agreement with one country may need a matching position in another to avoid double taxation. Then we outline what the process would require and what it tends to involve in time and effort.
