Transfer pricing disputes arise when the IRS believes that transactions between related companies are not priced on an arm’s-length basis. Under IRC §482, the IRS can adjust the income, deductions, or other tax items of related parties to reflect the results that would have been expected between independent companies.
A dispute may arise during an IRS examination or after the IRS proposes a transfer pricing adjustment. Taxpayers may then have several options to resolve the dispute. This may include working with the IRS examination team, going to the IRS Appeals Office, requesting relief under a tax treaty through the Mutual Agreement Procedure (MAP), entering into an Advance Pricing Agreement (APA), or pursuing litigation.
The appropriate method to resolve a transfer pricing dispute depends on the size of the adjustment, the strength of the taxpayer’s documentation, the possibility of double taxation, and the need for certainty in future years.