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Federal Tax

Transfer Pricing Enforcement, Advance Agreement Changes Coming, IRS Official Says

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

As part of the IRS’ hiring initiatives, increased staff will focus on transfer pricing noncompliance using sophisticated data analytics, according to an agency official who also said the advance pricing agreement process will also receive some fine-tuning.

At a March 7 webinar jointly moderated by Greenberg Traurig and Clayton Utz, representatives from the IRS and the Australian Taxation Office—the country’s revenue collection agency—provided updates on their respective jurisdictions’ plans for the upcoming year in the global tax space. Among the topics broached by Jennifer Best, deputy commissioner of the IRS’ Large Business and International (LB&I) Division, was the U.S. government’s ongoing efforts to curtail abusive transfer pricing practices of multinational corporations aiming to lower their tax bill by illegally shifting profits to parts of the world with lesser tax rates in which they operate.

According to Best, LB&I’s total staff consists of about 4,500 employees, a number that has shrunk over recent years. The division is responsible for corporations with over $10 million in assets, “as well as a large portion of the partnership, global high wealth, international individual compliance work, and the competent authority work, which includes the majority of our international cooperation engagements,” she said, noting that in 2019, there were 128,000 corporations with assets exceeding $10 million.

With the IRS on a hiring spree as it has begun spending the first yearly allotment of additional funding granted by the Inflation Reduction Act (PL 117-169), LB&I will bolster its team and technologies in the transfer pricing space. “We are looking to hire new economists, tax law specialists, and revenue agents to work transfer pricing issues so we can increase our coverage,” said Best. “And we’re also looking to do more joint audit work,” she added, which will involve a bilateral and multilateral approach to coordinate with subject matter experts and data scientists equipped with advanced analytical software.

This, she said, is to emphasize risk areas to streamline workloads and issue selection. It has been expected that the IRS would use the $80 billion to ramp up transfer pricing scrutiny.

“It’s as much about using the data and the tools to identify compliant taxpayers as well as noncompliant taxpayers … so we can focus our energies and resources to areas and filings presenting the highest risk of noncompliance …” Best clarified. “As part of our transformation effort, we are also focused on expanding and improving our tax certainty and issue resolution work.” Penalties will also be evaluated by LB&I, more specifically when it is appropriate under statute and available guidance to assess a penalty.

Best later described the division’s plans for fleshing out hiring and training for partnership compliance issues. The Large Partnership Compliance Program will, among other things, look at how to most optimally examine complex, tiered partnerships.

Also on the horizon is a shakeup to how the IRS’ Advance Pricing Agreement (APA) Program, which merged in 2012 with a section of the Office of the U.S. Competent Authority to form the Advance Pricing and Mutual Agreement Program (APMA), goes about determining which taxpayers to enter into such agreements with. Under an APA, the IRS and the taxpayer resolve transfer pricing matters under Code Sec. 482.

“The motivation here is not to limit or to decrease the number of APA requests that we take in,” Best stressed. “Simply put, we have some APAs that just haven’t been successful, and the reasons for that vary.” After webinar attendees submitted questions regarding the move for the event’s Q&A section, Best restated that the IRS aims to “make sure that what we take in and we work [on] is going to be successful for the intended goals all around.”

She alluded to an option currently in the works that will allow taxpayers to communicate more clearly with the IRS before entering into an APA. “Once finalized, we expect that there will be a mechanism for taxpayers to come in and obtain APMA’s preliminary view on whether the APA workstream is well-suited to successfully achieve certainty for the proposed covered transactions before they undertake to draft and submit a formal APA request,” Best said.

“And to us, this is just a matter of wise program stewardship.”

For more information about the APMA program, see Checkpoint’s Federal Tax Coordinator ¶G-4741.


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