The US Internal Revenue Service has released its Transfer Pricing Audit Roadmap, a 26-page outline of the two-year transfer pricing audit process, emphasizing up-front planning and a fact-based approach for examiners.
The roadmap, released on February 14, is part of an ongoing effort by the IRS Large Business and International Division to standardize the Exam process. The stated goal of the roadmap is to assist both the IRS and taxpayer in the identification, selection, discussion and resolution of potential transfer pricing issues in a timely and orderly fashion and to resolve issues in the Exam level rather than at Appeals.
The roadmap emphasizes the fact-based nature of transfer pricing audits, that “transfer pricing cases are usually won and lost on the facts.” It asserts that the facts should support a “working hypothesis” on the reasonableness of the intercompany pricing policies that discourages fishing expeditions. Lastly, the roadmap stresses the importance of an effective presentation that integrates facts and legal and economic principles into a compelling story.
The roadmap includes a timeline divided into three phases: planning, execution and resolution, setting out a two-year time frame from the beginning of an audit to its final resolution.
The planning phase is expected to take up to six months, during which the examiners would be engaging in pre-examination analysis, as well as preparation of initial risk analysis and examination plan. The second phase – the execution phase – would take approximately 14 months, during which the examiners would engage in additional fact finding and information gathering, as well as development of issues. The final or the resolution phase is expected to take up to 6 months; this phase includes the presentation and resolution of the issues and closing of the case.
References to relevant Internal Revenue Manual and tax code citations are provided for each step of the process.
The IRS emphasizes that the roadmap is not intended as a template, since every transfer pricing case is unique, and the examiner team will need to exercise its own judgment about how to best use these guidelines.
In addition, the roadmap will be evolving as the IRS receives feedback, and any users are encouraged to contact the Income Shifting Issue Practice Networks with suggestions on new or different audit tools or techniques. From a taxpayer perspective, the roadmap may be viewed as an encouraging sign that the IRS will be focused on the active management and timely resolution of transfer pricing issues.
The audit roadmap is available here.