Don’t panic, the IRS has laid out a process for examining transfer pricing in its Transfer Pricing Examination Process (TPEP), Publication 5300. The TPEP lays out three phases to a transfer pricing audit. (1) The planning phase determines the scope of the audit. (2) The execution phase is when the IRS develops issues and understanding of the various tax implications of the issues. (3) During the resolution phase, agreement is reached, if possible. Transfer pricing audits can take months, or even years, to resolve. You can prepare for transfer pricing audits by ensuring your transfer pricing documentation and intercompany agreements are current and work with the IRS to hopefully resolve your issues sooner rather than later.
In the planning stage, a transfer pricing audit is much like the planning stage of a financial audit, as the scope of the examination is determined. The IRS and the taxpayer typically work together to establish a plan that identifies the issues, documents audit steps, timelines and communication agreements (i.e., how and when items will be requested and submitted).