LB&I explains 'rules of engagement' in examinations of transfer-pricing issues.

• Author: Dell, Michael
• Position: IRS Large Business and International Division

On Aug. 12, 2014, the IRS Large Business &International (LB&I) division released general guidelines and rules of engagement for LB&I examiners employed in the Transfer Pricing Practice (TPP) and the International Business Compliance unit (IBC) involved in the examination of transfer-pricing issues.

Rather than assigning "control" of transfer-pricing issues to either group, the document states that it is "imperative that TPP and IBC work transfer pricing issues together, as a unified team." It further stresses that "the IBC and TPP management teams ... have joint responsibility for the national transfer pricing inventory" In case of disagreements, issues will be elevated to the next level of management and decided, in every case, consonantly with "the best answer from the standpoint of the U.S. government."This new document should be understood as a complement to the transfer-pricing audit road map released last year.

Detailed Discussion

Last year's road map was organized around a basic 24-month audit timeline, breaking down a transfer-pricing audit into three phases: planning, execution, and resolution. The core team members in all three phases always included TPP personnel, which suggested a more substantial involvement, and the appearance of more "control" over the examination of transfer-pricing issues by the TPP than the IBC. Such an approach would have not been without merit, as TPP personnel frequently have broader expertise in the transfer-pricing arena.

The recently released rules of engagement, on the other hand, favor a more collaborative approach between IBC and TPP team members. Moreover, the rules of engagement explain that, "in many or even most cases, the TPP, as a result of its limited resources, will have no involvement in the day-to-day management of the issue." The roles and levels of engagement of TPP personnel will vary from case to case and from phase to phase. Therefore, TPP's roles and levels of engagement are described as a flexible and dynamic approach that allows for changes and adjustments during the lifecycle of the audit.

IBC and TPP management have joint responsibility for the national transfer-pricing inventory; the general guidelines, however, mandate that the TPP "must have visibility into the entire inventory." Despite this being a reasonable approach, only time will tell whether the two groups will follow the mandate in practice.

Levels of TPP Involvement

Consistent with the sometimes limited role of TPP...