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Federal Tax


TRANSFER PRICING ENFORCEMENT, ADVANCE AGREEMENT CHANGES COMING, IRS OFFICIAL
SAYS

Tim Shaw  

March 14, 2023 · 5 minute read

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Tim Shaw  

March 14, 2023 · 5 minute read

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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.

 

Get all the latest tax, accounting, audit, and corporate finance news with
Checkpoint Edge. Sign up for a free 7-day trial today.

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