Tax Break

IRS’s Maruca: Tell a broader story during transfer pricing tax audits

June 6, 2012

Calling all English majors: Corporate tax departments may soon need your skills to  explain their international networks to tax authorities.

The U.S. Internal Revenue Service is investigating how companies buy assets from and sell assets to their subsidiaries, which may be scattered all over the world. These inter-company transactions can have big tax consequences for companies, and the IRS is looking to crack down on abuses.

Sam Maruca, the head of the IRS transfer pricing operation, told attendees at a transfer pricing conference in Washington on Monday that companies need to tell a story when explaining their transfer pricing work.

Companies usually deluge the IRS with documentation, Maruca said. “Often we get the kitchen sink.” He asked the room full of tax attorneys and corporate transfer pricing specialists to put their businesses in context and anticipate IRS questions.

“If you want us in and out fast, explain your business. That’s not typically what I’m seeing,” he said.

IRS regulations for documentation do not specify what the IRS needs and how to arrange it, Maruca said. The regulations “don’t ask to tell a story,” he acknowledged.

Even so,  it’s that story the IRS wants to know, he said. “We don’t want to be all over the map and wasting your time,” he said.

The IRS has staffed up its transfer pricing team in the last year and now has more than 100 people, Maruca said. But the IRS has struggled to complete new company workout agreements, known as advance pricing agreements. This lack of clarity can leave companies in the dark when trying to calculate their tax liabilities.

The agency has a “giant backlog” of cases to work through, he said. And unless the IRS can work through cases more quickly “we’re going to drown,” Maruca said.

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