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September 22, 2022

Official reemphasizes IRS focus on penalties in transfer pricing cases

  • At a September 20, 2022 seminar hosted by the Tax Executives Institute (TEI), an IRS official commented on the IRS's focus on applying IRC Section 6662 penalties in transfer pricing cases where appropriate.
  • The IRS continues to seek to improve the quality of transfer pricing documentation it receives from taxpayers.
  • Taxpayers should consider revisiting the status of their transfer pricing documentation.

During a TEI seminar on September 20, 2022, an official working in the IRS's transfer pricing practice stated that the IRS will assert more penalties in the hopes of receiving better documentation reports, according to an article in Tax Notes Today.1 Although the IRS will not apply a "'wholesale across-the-board' assertion of penalties," the official noted that it previously failed to apply penalties where appropriate. In the future, the IRS aims to refocus its efforts on applying penalties to avoid such errors.


IRC Section 6662 imposes a penalty on any underpayment attributable to a substantial valuation misstatement pertaining to either a transaction between persons described in IRC Section 482 (the transactional penalty) or a new IRC Section 482 transfer price adjustment (the net adjustment penalty). The penalty equals 20% of the underpayment of tax attributable to the substantial valuation misstatement. Under IRC Section 6662(h), the penalty increases to 40% of the underpayment for a gross valuation misstatement for either penalty. IRC Section 6662(e)(3)(B) may protect against penalties if the taxpayer (1) used a regulatory-specified method to determine the transfer price, (2) has documentation to support the selection of the price and (3) provides the documentation within 30 days of a request from the IRS.

Application of IRC Section 6662 penalties

The IRS official's statement aligns with the IRS's previous guidance on penalizing inadequate documentation. In a 2018 memorandum, the Commissioner of the Large Business and International Division outlined the purpose of the penalties as "holding taxpayers accountable for the reasonableness of their return positions and helping motivate taxpayers and their advisors to not only take reasonable return positions but also to adequately document them."2 To meet these objectives and appropriately apply penalties as required, the IRS must evaluate taxpayer documentation for adequacy and reasonableness, by applying the factors in the regulations.3

The IRS also released FAQs on transfer pricing documentation best practices in 2020 (see Tax Alert 2020-1036). The FAQs seemed to encapsulate the IRS's broad, long-standing experience of receiving deficient IRC Section 6662(e) documentation during audits, resulting in the IRS raising more transfer pricing issues and lengthening the timeline to complete an audit. The FAQs also indicated that taxpayers likely need to reevaluate the benefits of standardizing and commoditizing documentation as they seek to comply with multiple jurisdictions' documentation requirements.


With the IRS's renewed focus on IRC Section 6662 penalties, now is the time for taxpayers to revisit the status of their transfer pricing documentation, particularly given the IRS's public pronouncements about its intentions. Taxpayers should seek transfer pricing documentation reports that are robust and fully compliant with the requirements of IRC Sections 482 and 6662 and their respective regulations.


Contact Information
For additional information concerning this Alert, please contact:
National Tax Department, International Tax and Transactions Services, Transfer Pricing
   • Ryan J. Kelly, Americas ITTS Tax Controversy Leader (
   • Hiro Furuya (
   • Ameet Kapoor (
   • Carlos M Mallo (
   • Marla McClure (
   • Donna McComber (
   • Mike McDonald (
   • Tom Ralph (
   • Craig Sharon (
   • Kent Stackhouse (
   • Thomas A. Vidano (
   • Heather Gorman (
   • Giulia Di Stefano (
   • Carolina Figueroa (
   • Mitch Gibson (


1 Kiarra M. Strocko, IRS May Assert More Penalties for Transfer Pricing Documentation, Tax Notes Today (September 21, 2022).

2 Instructions for Examiners on Transfer Pricing Issue Examination Scope — Appropriate Application of IRC Section 6662(e) Penalties.

3 Id.