IRS revenue agents and auditors create many unnecessary challenges for multinational businesses who utilize internal transfers to gain a tax advantage. This presents major obstacles during an IRS audit involving transfer pricing and other international tax related issues. The experienced international tax and business attorneys at Allen Barron, supported by our accounting and tax preparation team, are uniquely positioned to represent and protect your interests in an IRS audit.
J. Russell George, the Treasury Inspector General for Tax Administration (TIGTA), recently released a report criticizing some IRS auditors and employees for their failure to consistently apply and follow the IRS’s “Transfer Pricing Audit Roadmap.” This internal tool was specifically developed to provide tools and audit techniques for IRS examiners who are facing audits that involve multinational transfer pricing. The issue is further complicated when examiners fail to involve internal IRS experts in these complex audits.
When a multinational company transfers a good or service between entities associated with one another, the transaction is supposed to be conducted “at arm’s length” as if the two companies were not associated in any manner. The transfer pricing, or cost of transferring the goods or services from one to another, must be carefully structured to comply with US tax codes and international law. This is to prevent a corporate tax strategy that manipulates the tax basis in transactions and inventory through sophisticated under-valuation techniques and strategies. The IRS is concerned that multinational companies are using transfer pricing as a vehicle to shift profit from the US to other sovereign nations with lower tax burdens. An IRS audit involving transfer pricing will receive additional attention and attempts will be made to challenge and significantly increase the tax exposures for business clients.
“International tax noncompliance is an area of strategic focus for the IRS,” said the TIGTA Inspector General. “By improving the efficiency of its transfer pricing examination process, the IRS can make important progress in achieving its goal of reducing the international Tax Gap.”
The IRS acknowledges the importance of transfer pricing as an audit flag and strategy. The agency intends to increase revenue by cracking down on transfer pricing violations. Douglas W. O’Donnell, commissioner of the IRS’s Large Business and International Division writes “Transfer pricing is a significant compliance issue facing the IRS. Indeed transfer pricing issues account for a significant percentage of international issues being worked and a substantial portion of potential dollar adjustment.”
If you are a business owner with multinational corporate structures or joint ventures the international business and tax attorneys at Allen Barron are a valuable partner. We combine multiple tax, accounting, business and legal disciplines in a singe-source vendor. This reduces costs through economies of scale, while providing a much deeper and more accurate perspective on issues ans challenges faced by your organization. If you are facing an IRS audit involving transfer pricing we invite you to contact us for a free consultation at 866-631-3470.