• Author
  • Recommend
  • Tags
  • Connect
  • Download


IRS releases Transfer Pricing Audit Roadmap

The Internal Revenue Service released its Transfer Pricing Audit Roadmap earlier this year. Learn about its three phases and implications for taxpayers.

On 14 February 2014, the Internal Revenue Service (IRS) issued the Transfer Pricing Audit Roadmap, which provides best practices and helpful reference materials for Large Business & International (LB&I) employees regarding the administration of transfer pricing audits.

The Roadmap, organized around a basic 24-month audit timeline, breaks down a transfer pricing audit into three phases: planning, execution and resolution, under the rubric of the IRS Quality Examination Process.

Planning phase

1. Preliminary assessment

The initial planning phase can last up to 6 months and starts before the 24-month audit cycle begins. Examiners are instructed to review the taxpayer’s returns and are encouraged to familiarize themselves with the taxpayer’s business operations and to perform preliminary economic analyses. Essentially, this phase of the exam involves reviewing the information already at the IRS’ disposal, including prior audit cycle results, reports and Appeals Case Memoranda, as well as internal IRS tools to conduct industry analyses.

The examiner also prepares the mandatory information document request (IDR) and initial examination contact letter, both of which are issued simultaneously. Finally, the Roadmap makes the first of many references to Transfer Pricing Practice (TPP) involvement throughout the document, noting that a member of the TPP and/or an economist will participate in the preliminary assessments, and the level of involvement of a TPP member can range from advisor to lead examiner.

2. Internal Revenue Code Section 6662(e) documentation review

Examiners review and analyze the documentation and note areas that require further development, confirmation or inquiry. Examiners will determine whether the documentation meets the requirements established in the Regulations and coordinate with the economist and the TPP on the initial assessment and hypothesis.

3. Planning meetings

Along with discussing general items such as timeframes and key milestones, the preliminary planning meeting should be used as an opportunity for examiners to identify the key taxpayer personnel who will be responsible for assisting the exam team with the transfer pricing audit and to request data and records relevant for the transfer pricing audit. The Roadmap also instructs TPP members to discuss the IDR process with the taxpayer and specifically mandates Advance Pricing and Mutual Agreement notification with regard to challenged transactions involving treaty partners.

4. Opening conference

The opening conference, which kicks off the 24-month audit cycle, provides a forum for the audit team to discuss the general aspects of the audit process with the taxpayer.

5. Taxpayer orientations

Within 30 days of the opening conference, there will be a financial statement/books and records orientation meeting. The goal is to address all financial topics and can include:

• Reconciling from the geographical trial balance to the consolidated financial statement in the 10-K

• Reviewing segmented financial statements and roll ups to the consolidated financial statement

• Mapping from the tax return to trial balance to general ledgers

• Reviewing work papers for book/tax differences

• Gaining an overview of the taxpayer’s accounting practices and policies

Soon after, there should also be a transfer pricing orientation meeting. In that meeting, the examiner’s goal is to, among other things:

• Gain more insight into the taxpayer’s intercompany transactions

• Determine the functions performed, assets employed and risks assumed among controlled parties

• Identify who is responsible for tax planning

• Understand the value chain(s) associated with the intangible, services or tangible goods

• Gain an understanding of the taxpayer’s transfer pricing methodology

6. Preparation of initial risk analysis and audit plan

The last step includes the preparation of the risk analysis and audit plan, both of which are approved internally and then provided to the taxpayer. This period also serves as an opportunity to request additional information from the taxpayer.

Execution phase

The execution phase typically spans a 14-month period comprising two main steps.

1. Fact finding

Fact finding involves the issuance of any necessary additional IDRs, interviews of relevant taxpayer employees, and plant tours and site visits. The step gives the audit team the ability to perform in-depth functional analysis to identify all significant economic activities connected to the transactions under review. The examiner should also perform a comparability analysis.

The Roadmap instructs the audit team to meet with taxpayer to confirm the material facts developed during the examination. Particularly, a written statement summarizing the material facts from the exam team’s perspective should be provided to the taxpayer, and the taxpayer should be requested to provide a written confirmation or explanation of differences between its position and the IRS. This interactive process is anticipated to have a significant impact on case resolution.

The Roadmap also directs audit teams to coordinate any discrete legal issues found with Field Counsel, Associate Chief Counsel International, the TPP and the International Practice Network.

2. Issue development

The economist on the case is tasked with performing an economic analysis consistent with the working hypothesis, in consultation with various team members, including the examiner, the TPP member and field counsel. In addition to a strong and coherent economic analysis, an effective presentation of the position is required. This write-up, along with the preliminary economist’s report, will form the basis of the draft NOPA, which will be submitted to the taxpayer for discussion of inaccuracies and points of disagreement.

The ultimate goal being to have an agreed set of facts presented in the final NOPA, the process can be iterative, based on repeated rounds of receiving the taxpayer’s input and then redrafting. During this phase, the audit team should also consider the applicability of Section 6662 penalties and prepare a mutual agreement procedure report if applicable.

Resolution phase

The resolution phase usually occurs during the last seven months of the audit cycle and comprises three main steps.

1. Issue presentation

Prior to finalizing the NOPA, the audit team will meet with the taxpayer to discuss the government’s findings on all transactions at issue. The audit team should work to understand the taxpayer’s position, determine whether the taxpayer agrees with the facts as stipulated by the IRS and establish whether the taxpayer would agree to any issues.

2. Issue resolution

The audit team and the taxpayer will meet to determine whether a resolution of the issues raised is possible. The Roadmap suggests discussing pre-Appeals resolution opportunities on issues left unresolved at the examination level. Once all issues are fully developed and resolution efforts have been concluded, a final NOPA will be issued. For all agreed issues, a discussion of Rev. Proc. 99-32 election and its ramifications is appropriate.

3. Case closing/RAR

In the last step, the audit team will prepare a RAR/30-day letter for all unresolved issues, hold the Appeals pre-conference meeting and attend the post-Appeals meeting.


The Roadmap is a toolkit for conducting transfer pricing audits, from the identification of issues, to the formulation of a working hypothesis, to the resolution of the issues. The process relies heavily on open and active communication between the taxpayer and the exam team.

With an emphasis on the involvement of TPP members in every step of the audit, taxpayers should be prepared for scrutiny by professionals with sophisticated transfer pricing knowledge. Further, having robust documentation of transfer pricing methodologies is extremely important, as the Roadmap itself approaches the audit with the maxim that cases are “won or lost on the facts.”

With this in mind, the meticulously detailed steps set forth in the Roadmap could be designed to generate reports, notes and stipulated facts that could potentially form the basis of case development for litigation, in the event that issues are unable to be resolved at the Exam or Appeals levels.

The Roadmap points out that transfer pricing audits can take a much as two to three years. As such, the Roadmap is constructed on a two-year framework. The Roadmap seems to emphasize issue development over currency.

Taxpayers would be well-advised to take advantage of the Roadmap, which emphasizes cooperation among various groups within LB&I and with the taxpayer. Coupled with LB&I’s new IDR Directive, taxpayers should have the opportunity to frame their transfer pricing methodology in a compelling manner, clearly addressing the basis for their business decisions and the resulting financial outcomes and effective tax impact.

This article was first published in EY´s Global Tax Policy and Controversy Briefing, Issue 14, June 2014



Rob Hanson

Global and Americas Director – Tax Controversy Services

+1 202 327 5696


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

Font size

Tax topics >

No filter criteria selected.

Industries >

No filter criteria selected.

Countries >

No filter criteria selected.

 < Close


 < Close


 < Close

Tax topics

 < Close


 < Close


 < Close

0 articles have been saved