IRS Faces Obstacles Auditing Transfer Pricing

Internal Revenue Service examiners confront some steep barriers when trying to audit the transfer pricing strategies used by multinational corporations to reduce their taxes, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, found that some IRS employees may not be consistently following the IRS's Transfer Pricing Audit Roadmap, which the IRS developed to provide its examiners with a set of audit techniques and tools to help them do examinations of multinational transfer pricing. The IRS also doesn't have a process in place to make sure all transfer-pricing issues are identified for specialized review by IRS experts.

Transfer pricing is used to set a price for goods or services that are sold between two parts of the same multinational company. However, such pricing might not reflect the result of an arm’s length transaction. Instead it's really more like a related-party transaction and may allow the profits of a multinational corporation to be inflated in low-tax countries and reduced in high-tax countries.

IRS audits of transfer pricing transactions aim to improve taxpayer compliance. However, employees in the IRS's Transfer Pricing Practice don't have access to a Specialist Referral System to deal with such complex transactions and they need to rely on managers within the IRS's International Business Compliance function to share any transfer pricing referrals with them.

TIGTA also found that the rules of engagement between the TPP and the IBC function are not always being followed for working on transfer pricing-related examinations. There are no separate performance measures to weigh the success of the IRS’s transfer pricing efforts.