By: William E. Elwood

The Internal Revenue Service has increased its scrutiny of inter-company pricing practices of taxpayers with foreign affiliates and has provided agents conducting audits with standard language requesting information about such pricing, usually citing Treasury Regulation § 1.6662-2. 

Clients need to understand that these transfer pricing requests are part of a recent audit emphasis by the IRS and are procedurally different from the information requests typically made by the IRS during an audit because, among other reasons, they are subject to a special 30-day response requirement to avoid possible IRS penalties. 

Clients who receive such a request need to immediately (1) review their files and documents to see what written support they have for setting the terms of its cross border transactions between their foreign and US entities, and (2) contact and begin coordinating their response with their accountants and tax counsel. 

Clients who are not yet under audit should take advantage of the time they have before the next audit cycle to discuss their inter-company pricing with their accountants and tax counsel and assure that transactions between related entities are done on an “arm’s length” basis, as required by Section 482 of the US Internal Revenue Code and pursuant to written pricing analyses (which must have be in effect and binding at the time of an applicable transactions). 

For more information, please contact William E. Elwood in the Washington D.C. office at (202) 659-6972.