IRS Launches New "Transfer Pricing Practice" -- Pilot Program Will Select Audit Cases for Scrutiny

International Tax Alert

The IRS recently announced that it is taking new steps to improve its effectiveness in transfer pricing audits. In a series of speeches, top IRS officials announced the creation of a "Transfer Pricing Practice" within the Large and Mid-Size Business (LMSB) operating division to "strategically and systematically administer transfer pricing issues." This Practice (new terminology for the IRS) will assemble a group of experts from various parts of the IRS to better coordinate the handling of key transfer pricing cases and identify emerging issues. More efficient transfer pricing examinations as well as more consistent treatment of issues across the country are among the stated goals. Marshalling IRS expertise "to match up with corporate taxpayers" was specifically mentioned. At present, it is not entirely clear how the new Practice will interact with the existing Issue Management Teams, which already highlight two major transfer pricing issues (cost sharing/intangibles and Section 936 (Puerto Rico) exit strategies).

The new Transfer Pricing Practice is kicking off with a pilot program in which the IRS will select a number of cases for concentrated attention. Multi-functional resources will be brought to bear at an early stage of the process, including international examiners, economists, technical advisers, industry specialists, area counsel, and representatives from the Office of Associate Chief Counsel (International) and the APA Office. Cases are being selected from the perspective of strategic value and prospects for success. One must assume that the selected cases will receive comprehensive fact-finding, sophisticated analysis, and high level attention and review. Over the last year or so, the IRS has hired a substantial number of transfer pricing practitioners from the private sector. These individuals will likely contribute real-world experience and transactional familiarity, which are particularly valuable in transfer pricing cases.

The new IRS initiative is consistent with the top priority of transfer pricing issues from a tax compliance perspective, both in the United States and abroad. Transfer pricing -- the cross-border transfer of products, services and intangibles -- presents the potential for huge adjustments to taxable income, a fact not lost on revenue-needy governments in the current economic environment. Transfers of intangible property are viewed with great suspicion by tax authorities, as valuation of these assets is particularly uncertain and controversial. The House Ways and Means Select Revenue Measures Subcommittee will also be studying transfer pricing this year.

Taxpayers should expect an intensified focus on transfer pricing on the part of the IRS (and foreign) examiners and should be alert to the possibility of being targeted for intensive examination by the new Transfer Pricing Practice pilot. As the IRS sharpens its skill-set, taxpayers should be prepared to respond accordingly. Bringing one's transfer pricing up to suitable levels, by means of clear, up-to-date contemporaneous documentation or advance pricing agreements, would be wise. Coordination with requirements in foreign jurisdictions, which are increasingly stringent and detailed, is more important than ever.

If we can be of assistance in helping you assess transfer pricing compliance issues or deal with IRS examinations or related processes, including intergovernmental Competent Authority proceedings, please contact one of our transfer pricing group members, below. We work together with independent economic consultants and accounting firms as well as foreign practitioners to provide comprehensive service on global transfer pricing matters.

Note: Information on the IRS Transfer Pricing Practice comes from recent speeches given by the IRS Commissioner and the LMSB Deputy Commissioner (International) in various public forums.

For more information please contact the following attorneys at Caplin & Drysdale, Chartered:
Patricia Gimbel Lewis at 202-862-5017 or
John Breen at 202-862-7854 or
H. David Rosenbloom at 202-862-5037 or
Neal M. Kochman at 202-862-5024 or

To view our Transfer Pricing Brochure, click here.

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