Competent Authority Revenue Procedure


US taxpayers should prepare for major changes in the Internal Revenue Service's (IRS) transfer pricing audits. New procedures, sharpened objectives, accelerated taxpayer decision points and revised resolution opportunities will result from a confluence of just-issued IRS guidance. All will require refined handling of audits and sophisticated analysis of strategic options. The IRS seeks to alter markedly the dynamics and outcomes of transfer pricing audits, and taxpayers will need to plan and react accordingly.

The key IRS documents are the Transfer Pricing Audit Roadmap, released on February 14 2014, and upcoming revisions to the Competent Authority Revenue Procedure, released in draft form in December 2013 (Notice 2013-78). The substantive and strategic hand of the new Transfer Pricing Office within the Large Business and International Division, and its field-based Transfer Pricing Practice, are evident. Over the past year, the Transfer Pricing Practice – composed of some 70 experts divided into three geographic regions – has become embedded in the field, providing coordinated, substantive guidance; assisting with risk assessment; and participating directly in individual cases to varying degrees.


The roadmap reframes the IRS examination approach in an attempt to increase efficiency and effectiveness and to focus resources on the most important cases. With publication of the roadmap, the IRS has taken a bold step in clearly and candidly enunciating what it expects from field personnel and taxpayers with respect to transfer pricing audits. For taxpayers, this is an opportunity to prepare in advance of audit, with visibility into likely IRS approaches.

The field is directed to:

  • traverse thoroughly a taxpayer's transfer pricing landscape;
  • construct a malleable "working hypothesis";
  • risk assess the situation;
  • fully develop the facts;
  • write clearly; and
  • seek a "reasonable result".

The field's efforts are to be front-loaded, with up to six months of advance review and focused planning before the audit begins. Collaboration with the taxpayer and sharing of the field's analyses and its understanding of the facts are emphasised. While concisely written (26 pages), the roadmap incorporates by reference various additional administrative guidance and sends some very clear messages. A few aspects of note – some positive, some problematic – are as follows:

  • Early orientation sessions (ie, comprehensive presentations that anticipate the IRS's areas of inquiry) will provide an opportunity for the taxpayer to frame its viewpoints. An understanding of the whole process suggests the importance of a proactive stance by taxpayers.
  • Early, routinised financial analysis by the field (eg, ratio analysis, effective tax rate calculations and industry comparisons via the Capital IQ database) may (intentionally or otherwise) invite a formulaic approach to issue development. Taxpayers should be on notice that their websites will be scrutinised.
  • Early involvement of specialists in various areas (eg, economics, industry dynamics, transfer pricing law and methodologies, competent authority and treaty, advance pricing agreements and data analysis) will add expertise, but also many cooks to the decision-making process.
  • Despite public statements regarding case and issue selection, the roadmap itself does not emphasise the filtering process, apart from one welcome directive: "It is critical that, in every case, the team address in full the taxpayer's analysis – the taxpayer may well have the more compelling position on the issue."
  • The timing for development of the working hypothesis and the risk assessment – and the distinction between them – is blurred. The roadmap would more aptly be constructed as a 'decision tree', with some branches ending if either the initial risk assessment or the working hypothesis fails to bear fruit.
  • Generally speaking, a 24-month audit period, following six months of planning, is envisioned. This seems long for a purportedly streamlined process, without much evidence of flexibility to suit a particular case (eg, shortening or terminating an audit in appropriate circumstances), and may send mixed messages to the field.
  • Although comments on this organic document are broadly solicited, it is somewhat disquieting that these are to be submitted to the Transfer Pricing Operations' Income Shifting Issue Practice Network.

Competent Authority Revenue Procedure

The Competent Authority Revenue Procedure (assuming that it is finalised substantially in accordance with the draft) will markedly reposition and increase the role of the US competent authority in US-initiated transfer pricing cases. Recognising the competent authority's inevitable role, the examination process will, for the first time, be shaped by the US competent authority's input and dictate. The traditional role of IRS appeals will also change markedly. This push to get to the heart of double tax issues quicker will significantly change taxpayers' procedural options and will call for different strategic analyses. The new structure also largely eliminates a taxpayer's ability to seek reduction of adjustments in multiple venues – the so-called 'two bites at the apple'.

Much of this will be accomplished by accelerating and restricting access to the competent authority:

  • A taxpayer will not be able to take a case to the competent authority after signing a Form 870 with the field unless the US competent authority was consulted and agreed to the terms in advance. The Competent Authority Revenue Procedure also empowers the US competent authority to tell the field to change (or withdraw) its position. Early consultation with, and input from, the US competent authority is part of the roadmap described above.
  • If a taxpayer instead protests the adjustment to appeals, the taxpayer will be able to spend only a short time there – until 30 days after the opening appeals conference – before deciding whether it wants the competent authority's assistance. If so, it must immediately involve the competent authority, either by a direct approach to the US competent authority or by invocation of the joint appeals and competent authority process, known as the 'simultaneous appeals procedure'. Preparing for this decision and the related submission will be tightly compressed and accordingly challenging.
  • Finally, a taxpayer that pursues an appeals case through a Form 870AD settlement agreement, appeals mediation or appeals arbitration will be barred from access to the competent authority, even for the limited purpose of asking the US competent authority to seek correlative relief from the counterpart country without negotiation of the amount.

A separate change in case resolution dynamics at the audit stage is the opening of the Fast Track Settlement Process to transfer pricing cases – provided that the US competent authority is a participant. This mechanism will bring together field case development, hazards-of-litigation settlement authority, appeals mediation skills and the US competent authority's insight regarding competent authority process and players, all within a 120-day turnaround. This process may present a valuable 'one-stop shopping' opportunity, but will require skilful navigation by both the IRS and the taxpayer.

The revised competent authority procedures will also offer new opportunities and attitudes towards comprehensively resolving a broad swathe of a taxpayer's transfer pricing-related matters. The US competent authority will be able to initiate competent authority coverage of future years, related issues and additional countries. Moreover, the US competent authority will be able to enforce this expansion by rejecting the taxpayer's original request if the taxpayer does not agree to these expansions. While this broader sweep may prove beneficial in many cases, sensitive related issues, years or countries may be at risk in others.

Other related developments of which taxpayers should be aware include the extension of the competent authority's assistance to cover taxpayer-initiated positions, penalties and interests, as well as proposed new procedures for advance pricing agreements (IRS Notice 2013-79).


Overall, taxpayers should expect major changes in the transfer pricing audit process, affecting their related strategic considerations. The IRS's innovations are ambitious in scope, but inspiration needs to be matched by implementation. Rolling out these changes in an organisation as large and deep as the IRS will surely be challenging and the road could be uneven. However, current IRS leadership is strong and dedicated to these changes, and taxpayers should take them seriously.

For further information on this topic please contact Patricia Lewis,J Clark Armitage, Peter A Barnes or Neal M Kochman at Caplin & Drysdale, Chartered by telephone (+1 202 862 5000), fax (+1 202 429 3301) or email (,, or The Caplin & Drysdale website can be accessed at