One of the ways the IRS is going to put its $80 billion to use is increasing the number of transfer pricing audits it conducts. In a nutshell, transfer pricing is the process that establishes whether related party transactions between parties in the U.S. and foreign jurisdictions are priced fairly.
The IRS recognizes the potential for taxpayers to shift profits from one country to another through their pricing of goods and services exchanged. So, the IRS’s Large Business and International (LB&I) Division will work to increase staff and technology to combat these transfer pricing practices.
What does this mean for taxpayers?
These audits, which investigate prices and transactions, are often long and drawn out as they may involve two or more governments. This is an expensive proposition considering professional fees alone.
In addition, if the audit determines that an unfair pricing was used, the penalties are steep. In the U.S., the penalty is assessed on the underpayment of tax liability and is generally 20%, with the potential to double to 40% in certain circumstances.
What can taxpayers do?
“Taxpayers will want to work with a tax expert to obtain a transfer pricing study,” says Pinion tax advisor, Beth Swanson.
This is an in-depth analysis of the related party transactions across borders and a comparison to economic data from other taxpayers in similar industries.
“A study does not prevent a transfer pricing audit but does demonstrate to the government initiating the audit that the taxpayer is prepared and has put forth a good faith effort to follow the rules,” Swanson explains. “When an audit is initiated, the first request is to provide a copy of a transfer pricing study.”
For any questions or concerns about these changes and their impacts, or to obtain a transfer pricing study, please contact a Pinion tax advisor.