Transfer Pricing Penalty and Documentation Best Practices

Summary

This practice note discusses transfer pricing (TP) penalties described in I.R.C. Section 6662 and the documentation of best practices that may prevent or mitigate TP penalties. I.R.C. Section 6662 TP penalties generally occur when there is an underpayment of tax attributable to a valuation misstatement, subject to certain thresholds. An understanding of documentation best practices is important because I.R.C. Section 6662(e)(3) imposes a TP penalty only if taxpayers fail to document their TP position adequately. Proper documentation is necessary because it decreases the number of issues the IRS could potentially select for examination.