Office of Audit
BARRIERS EXIST TO PROPERLY EVALUATING TRANSFER PRICING ISSUES
Final Report issued on September 28, 2016
Highlights of Reference Number: 2016-30-090 to the Internal Revenue Service Commissioners for the Large Business and International and the Small Business/Self-Employed Divisions.
IMPACT ON TAXPAYERS
Transfer pricing refers to the setting of a price for goods or services sold between one member of a multinational entity and another member of the same entity. The principal tax policy concern regarding aggressive transfer pricing is that it does 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 voluntary taxpayer compliance attributable to these types of transactions.
WHY TIGTA DID THE AUDIT
Cross-border trade in goods and services has increased substantially over the past several decades. The IRS has designated transfer pricing as a key focus of its international compliance initiatives. Transfer pricing issues account for approximately 46 percent of the Large Business and International Division’s international issues inventory and 71 percent of the potential total dollar adjustment amounts of all international issues. This audit was initiated to identify and assess the barriers to the IRS efficiently evaluating transfer pricing issues.
WHAT TIGTA FOUND
The IRS provided external stakeholders adequate education and outreach related to the transfer pricing examination process; however, some IRS employees may not be consistently following the Transfer Pricing Audit Roadmap. The IRS also does not have a process to ensure that all transfer pricing issues are identified for specialized review because 20 percent of the transfer pricing inventory is received from the Specialist Referral System. 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. In addition, the Rules of Engagement between the TPP and the IBC function are not always being followed for working transfer pricing-related examinations.
Also, there are no separate performance measures related to quantifiable results to determine the success of the IRS’s transfer pricing efforts, including Appeals determination information that could be used to better refine the approach for identifying and working cases.
WHAT TIGTA RECOMMENDED
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.
The IRS agreed or partially agreed with five recommendations, and disagreed with two recommendations. While IRS management stated that they specifically track and monitor transfer pricing examinations and adjustments, identifying the assessment results of compliance efforts by issue would require modifications to several existing systems and necessitate a substantial expenditure of funds. However, in a response to a prior TIGTA report, Large Business and International Division management agreed to provide “compliance results by issue from the Issue Based Management Information System for use by the practice areas in the development of campaigns.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta