LMSB Commissioner Directive
Transfer Pricing Compliance Process
January 22, 2003
Documentation
1. At the joint opening conference for each audit cycle, issue a written information
document request for a copy of any transfer pricing documentation prepared by
the taxpayer pursuant to section 6662(e). The following language should be used
to request the pricing documentation: “Please provide within 30 days of this
request any principal documentation outlined in Treas. Reg. § 1.6662-
6(d)(2)(iii)(B) that has been prepared.”
2. Apply the 30-day time frame provided by statute for providing a copy of any
documentation prepared pursuant to section 6662(e). The discretion authorized
documents is limited to those situations where the taxpayer has made a good
faith effort to comply and promptly remedies the failure when it becomes
known, and should be exercised sparingly. With the exception of the principal
documentation items described in Treas. Reg. § 1.6662-6(d)(2)(iii)(B)(9)
and (10), any documentation prepared by taxpayers pursuant to section 6662(e)
must be in existence when the return is filed in order to be used to meet the
documentation requirement of Treas. Reg. § 1.6662-6(d)(2)(iii).
3. If, as the statute permits, the taxpayer has not prepared section 6662(e)
documentation, issue a written information document request at the beginning
of the audit for relevant information regarding the taxpayer’s transfer pricing
practices. An exception should be made only if recent experience with the
taxpayer has indicated that examination of some or all transfer pricing issues is
unnecessary, and there have been no major changes in the taxpayer’s transfer
pricing practices.
4. Follow similar processes where Industry Cases are selected for audit.
Audit Planning Process
1. As soon as the taxpayer’s section 6662(e) documentation or other transfer
pricing information is received, refer it to an international examiner and/or
economist for risk assessment.
2. If the risk assessment indicates that transfer pricing issues should be examined,
include those issues in the audit plan.
3. In accordance with current IRM procedures, refrain from pursuing de minimis
transfer pricing adjustments. Where the Limited Issue Focused Examination
(LIFE) process is being used, the materiality thresholds and other procedures
specified in IR 2002-133 (December 4, 2002) should be followed for transfer
pricing issues, as for others.
Section 6662(e) Penalty
1. Assert the penalties provided under section 6662(e) where warranted. Under the
law, an otherwise applicable net section 482 transfer price adjustment penalty
under section 6662(e)(3) may not be waived unless documentation is prepared
and submitted in accordance with the requirements of the statute and
regulations.
2. If the team decides to propose an adjustment that would trigger a section 6662(e)
penalty, the Penalty Screening Committee must review the case before the 30- or
90-day letter is issued. (See Announcement 96-16, 1996-13 I.R.B. 22.)
3. If the penalty threshold is met but the team decides not to propose the penalty,
the concurrence of the responsible International Territory Manager must be
obtained. The International Territory Manager should forward a copy of
relevant documentation that explains the decision to the International Penalty
Technical Advisor.
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