Category Archives: criminal tax law

On the IRS website "Transfer Pricing Documentation Frequently Asked Questions (FAQs)" (updated 4/14/2020), the IRS has issued a series of frequently asked questions (FAQs) concerning the best practices and common mistakes in preparing transfer pricing documentation.

IRC Sec. 6662(e)(1)(B)(ii) provides that there is a substantial valuation misstatement if the net section 482 transfer price adjustment for the tax year exceeds the lesser of $5 million or 10% of the taxpayer's gross receipts ("net adjustment penalty"). 

The 20% (or 40%) Code Sec. 6662 penalty for underpayment of tax attributable to a substantial valuation misstatement (or a gross valuation misstatement) applies to Code Sec. 482 
company pricing adjustments.

 
Generally, if the dollar thresholds of the net adjustment penalty are met, a taxpayer potentially can avoid the penalty if the taxpayer's APA has satisfied the transfer pricing documentation requirements of Code Sec. 6662(e)(3)(B) and Reg. §1.6662-6 (sometimes referred to as the 6662(e) documentation). Reg. § 1.6662-6(d)(2)(iii)(B) sets forth the principal documents that must be maintained by a taxpayer to satisfy the 6662(e) documentation requirements.

The documentation must also be assessed for adequacy and reasonableness. To satisfy the documentation requirement of the penalty regulations, taxpayers must select and apply a method in a reasonable manner and document the fact they reasonably selected and applied the best method for their analysis. (Section A of Transfer Pricing Documentation Frequently Asked Questions (FAQs))

• The suggestions and recommendations are consistent with the requirements in the regulations to provide adequate and reasonable support for the arm's length nature of intercompany pricing.
• Many taxpayers would benefit from insights on the information that could be provided to the IRS to increase the chance of audit deselection or more efficient audits.
• The IRS believes the potential for deselection of issues earlier in the examination process could be a powerful incentive for many taxpayers to improve their transfer pricing documentation.
• These FAQs and responses are illustrative and are being shared in the spirit of transparency to encourage cooperative compliance by taxpayers. The responses, and examples therein, are high-level only and should not be relied on to analyze actual transactions.

According to Law360, when the IRS' operations are fully restored, the agency will have to face a mounting set of problems that have grown while offices have been shuttered, and addressing problems with the CDP program is likely to be low on its list of priorities, according to Bob Probasco, director of the Texas A&M University School of Law's Low-Income Tax Clinic.

While the agency is currently tied up with doling out economic impact payments to mitigate the economic effects of the pandemic, and it still has to fulfill its obligations under recently passed laws such as the Taxpayer First Act and the Tax Cuts and Jobs Act,  the CDP program remains vitally important, according to Caleb Smith, director of the University of Minnesota Law School's Ronald M. Mankoff Tax Clinic.

"Once we're done focusing so heavily on getting money to people, the next thing is going to be, now people can't afford to pay back taxes, and CDP will probably take an even higher priority then," he said.

An initiative known as the CDP Summit, a collaboration among private tax practitioners, law professors, directors of low-income taxpayer clinics and the IRS aimed at putting in place needed reforms to the CDP program, was launched as a result of a panel discussion at the American Bar Association Section of Taxation's 2019 May meeting on issues with the program. That effort, and government reports, have identified ways the program can be improved.

The CDP Summit has already resulted in some positive changes, according to Schmidt. After a discussion during a December low-income taxpayer representation workshop in Washington, the IRS chief counsel's office released legal advice saying requests for hearings that taxpayers incorrectly send to the wrong address would still be treated as timely filed, Schmidt said.

T. Keith Fogg, the director of the federal tax clinic at Harvard Law School's Legal Services Center, who is also involved with the summit, said he doesn't know when it will resume. For the time being, the pandemic has reduced some of the pressures on the CDP program, since the IRS has temporarily paused lien and levy enforcements through July 15 and will be slow to restart that work, Fogg said.

The summit's work so far has led to significant improvements in CDP notices, Fogg said, noting the newest version of the notice provides more information on the opportunity for a CDP. hearing. However, more needs to be done to ensure that taxpayers understand they have to act to preserve their rights to a hearing under the CDP program, he said.

A taxpayer may not raise issues in a CDP hearing if the issues have already been raised and considered at prior judicial or administrative hearings and the taxpayer meaningfully participated in those hearings, according to the national taxpayer advocate's 2019 annual report to Congress. Taylor said he'd lost three cases at the appellate level arguing taxpayers should have the opportunity to litigate their liabilities in CDP hearings if they haven't already had the opportunity to challenge them in court.

While the number of CDP cases may increase due to the pandemic, participation rates are not likely to follow suit, Santos said.

"The absolute number of CDP hearings might rise, but I'm not sure that the rate of CDP hearings requested as a percentage of all lien and levy notices will rise," he said.

Whether more hearings occur will depend on how IRS collection staffers manage their workload, Taylor said. He's not sure, he said, how nuanced an approach the agency will take to collection work starting July 15, but he was confident more taxpayers would find themselves struggling.

"You're going to have a lot of folks who have new tax problems or have a new inability to manage tax problems that were being managed," he said, adding that many people who weren't previously in the position of having to choose between paying taxes, and food or housing costs, will find themselves there.

1. The CFC must be carrying on activities “through a branch or similar establishment” outside its country of incorporation, and
2. The conduct of activities in this manner must have “substantially the same effect” as if the branch were a wholly owned subsidiary of the CFC.