Tax Administration:

IRS' Advance Pricing Agreement Program

GGD-00-168: Published: Aug 14, 2000. Publicly Released: Sep 27, 2000.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) Advance Pricing Agreement Program, focusing on the: (1) extent of advance pricing agreements (APA) use by U.S. taxpayers, including those that have had transfer pricing disputes with the IRS; (2) timeliness of IRS' APA processing; and (3) results of IRS' review of taxpayers' annual reports on compliance with APAs.

GAO noted that: (1) based on IRS information, as of September 30, 1999, 244 business taxpayers had either entered into an APA with IRS or had one pending; (2) IRS records also showed that at least 88 other taxpayers were identified as having considered APAs, but for various reasons, they did not complete the process; (3) according to an IRS official, the majority of taxpayers involved in its APA program were large corporations, and they were spread across many industries; (4) also, most U.S. taxpayers that had recent transfer pricing disputes with IRS had not participated in the APA program as of September 30, 1999; (5) as of that date, 10 percent of the 1,245 large corporate taxpayers with international related parties had an approved agreement or had one pending, but the 10 percent accounted for 42 percent of the dollar value of the intercompany transactions in GAO's analysis of large taxpayers; (6) IRS did not consistently meet its timeliness targets for processing unilateral APAs and the first phase of bilateral APAs; (7) although IRS did not have targets for completing bilateral agreements in their entirety, some were pending for several years, even after their proposed time periods had expired; (8) in particular, IRS did not have targets for completing the part of bilateral agreements involving negotiations with tax authorities in other countries; and (9) while IRS has acted to address what its officials said were some of the reasons for the timeliness problems, it is unlikely to resolve them without gathering more information to determine the causes.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: According to IRS, the Advance Pricing Agreement Program (APA Program) director has modified the computerized information reporting system, CASE, to systematically capture data on the causes of delays in APA processing. CASE now contains a code to show that a particular APA is proceeding normally or, where the APA is delayed, a series of nine codes to identify a specific source of the delay and one code for other unspecified delays. In April 2001, APA program director confirmed that the coding system was implemented. He also provided GAO with information on the codes and a copy of the tracking sheet used to record the status of APA team leader's cases. Each week, the APA team leader responsible for an APA is to assign one of these codes to each APA in his or her inventory. This information goes into the computerized case file associated with that APA in CASE. These codes will be available for future computer generated management reports for tracking and analyzing the causes of APA processing delays. In a September 2002 update on the status of this recommendation, the APA program director told GAO that IRS has done some analyses of the data collected. The analyses showed some inconsistencies relative to data entry which IRS expects should be corrected now that online data entry was implemented. According to IRS, preliminary data show that taxpayer caused delays are the principal type of processing delay. IRS has also instituted a new process that requires each closed case file to include a brief discussion on whether the case meet the agreed upon schedule for processing.

    Recommendation: The Commissioner of Internal Revenue should take steps to cost-effectively collect data on APA processing suitable for analyzing the causes of delays and developing options for improvement. Such steps might include documenting deviations from plans or schedules and the reasons why in case files or modifying the Chief Counsel's Automated Systems Environment database to systematically capture such data.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: On November 13, 2000, IRS issued a press release stating that it has entered into an agreement with the United Kingdom on processing of competent authority cases, which includes APAs. The agreement sets a target period of 22 months to process competent authority cases. This period includes both preparing and exchanging position papers and negotiating the case. According to IRS, the agreement would reduce the time required to process bilateral APAs. One June 25, 2004, IRS announced that that the Pacific Association of Tax Administrators (PATA) has finalized internal operational guidance with respect to mutual agreement procedures and bilateral advance pricing arrangements. PATA is an inter-governmental organization whose members include Australia, Canada, Japan, and the United States. The guidance sets a goal of completing bilateral APAs with 2 years.

    Recommendation: The Commissioner of Internal Revenue should test the use of written timeliness targets for processing bilateral APAs to determine the feasibility of using them for all bilateral APAs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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