How the examination tends to unfold
Transfer pricing reviews of larger companies are generally handled by the IRS Large Business and International division, often with economists who concentrate on pricing issues. The examination typically starts with document requests, interviews with finance and operations staff, and a request for the documentation the company prepared to support its prices. Examiners compare the functions and risks the company describes with what its records, emails, and organization charts show. If they disagree with the pricing, they may propose an adjustment that shifts income into the United States, sometimes together with penalties. A transfer pricing audit can run for an extended period, and the positions taken in the first responses tend to shape the rest of it.
Answering requests without creating new problems
When the IRS asks for transfer pricing documentation, the rules give the company a short window to produce it, and documentation that cannot be produced in time may not protect against penalties. Responses should be reviewed before they go out, because a casual explanation from a manager can contradict the economic analysis the company relies on. Gather the intercompany agreements, the studies for each year under review, the data behind the comparables, and the accounting entries that show how prices were actually applied. If documents are held by a foreign parent or affiliate, plan early for how they will be collected and translated. Every request deserves a careful answer, although its scope can sometimes be discussed with the examiner.
Routes for a disputed adjustment
If agreement is not reached during the examination, a proposed adjustment can usually be taken to the IRS Independent Office of Appeals, and later disputes may go to the Tax Court or another federal court. Where a tax treaty applies, the company may also ask the competent authorities of the two countries to resolve double taxation through a mutual agreement procedure, and the order in which these routes are used can affect what remains available. A foreign affiliate may need to ask its own tax authority for a corresponding adjustment. At the outset we review the requests received so far, the documentation on file, and the response dates, and then map which issues are worth contesting and through which channel. Coordinating with advisers in the other country is often part of the plan.
