WASHINGTON- Although the Internal Revenue Service (IRS) provided external stakeholders adequate education and outreach related to the transfer pricing examination process, barriers exist that impede the IRS from properly evaluating transfer pricing issues, according to a new report issued publicly today by the Treasury Inspector General for Tax Administration (TIGTA).
Transfer pricing refers to the setting of a price for goods or services sold between two members of the same multinational entity. Such pricing may not reflect an arm's length result from a related party transaction, causing multinational corporation profits to be intentionally inflated in low-tax countries and reduced in high-tax countries. The IRS's priority is to improve taxpayer compliance attributable to these types of transactions.
TIGTA initiated this audit to identify and assess the barriers to the IRS's efficiently evaluating transfer pricing issues.
In its review, TIGTA found that some IRS employees may not be consistently following the Transfer Pricing Audit Roadmap, which was developed to provide IRS examiners with audit techniques and tools to assist with the planning, execution, and resolution of transfer pricing examinations. Moreover, the IRS does not have a process to ensure that all transfer pricing issues are identified for specialized review. Further, Transfer Pricing Practice (TPP) employees do not have access to the Specialist Referral System and are reliant on International Business Compliance (IBC) function management to share any transfer pricing referrals with them.
TIGTA also found that the Rules of Engagement between the TPP and the IBC function are not always being followed for working transfer pricing-related examinations, and that there are no separate performance measures related to quantifiable results to determine the success of the IRS's transfer pricing efforts. The review also attempted to quantify the ultimate impact of the IRS's transfer pricing compliance efforts. The IRS does not track the amount of proposed transfer pricing adjustments or the outcomes of transfer pricing issues.
As part of the audit, TIGTA identified all of the cases in Calendar Years 2012 through 2014 that included at least one transfer pricing issue with appealed adjustments, and determined that, out of approximately $10.5 billion in proposed adjustments, the IRS Office of Appeals reduced the original proposed adjustment amounts by $8.5 billion. After post-Appeals processes, only approximately $321 million was ultimately assessed on those taxpayers for transfer pricing and other tax issues.
TIGTA recommended that the IRS ensure that employees follow the Transfer Pricing Audit Roadmap, and include this as an attribute of the quality review process; ensure that TPP employees have full access to the Specialist Referral System; ensure that TPP and IBC function employees follow the Rules of Engagement, and include this as an attribute of the quality review process; develop a formal transfer pricing strategy; and implement a postmortem review of examinations with transfer pricing issues that went through the Appeals process.
"International tax noncompliance is an area of strategic focus for the IRS," said J. Russell George, Treasury Inspector General for Tax Administration. "By improving the efficiency of its transfer pricing examination process, the IRS can make important progress in achieving its goal of reducing the international Tax Gap," Inspector General George added.