Transfer pricing audit is getting a momentum and is being perceived as a big weapon in the hands of IRS for the adjustments. IRC 482 gives immense powers to IRS for adjusting income, credits and deductions of a taxpayer where it finds that a revenue is lost due to the related party transactions that were not conducted on arm’s length standard.
The IRS’s Large Business and International division has released a roadmap providing detailed guidance on transfer audits, including audit techniques and tools to assist with transfer pricing exams, as well as an estimated timeline for the exam, insights as to how the exams will be conducted, and tips for upfront planning.
The roadmap provides the key themes and acknowledges that cases are won and lost on the facts and that enforcement of the arm’s length standard requires the exercise of judgment. As a result, the roadmap encourages IRS examiners to keep an open mind during the examination and avoid “fishing expeditions” (theories in search of facts). Ultimately, the roadmap encourages IRS auditors to determine a reasonable result under the facts and to consider that the taxpayer may have the more compelling theory regarding its situation.
It must be remembered that the roadmap is not an official guidance but a working document for the auditors in planning their audits without having to consult with the Internal Revenue Manual at all times. The roadmap would be equally helpful to the taxpayers and the IRS auditors to understand the objectives and plan for the equitable outcome.
The document can be found at http://www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.