LB&I Explains “Rules of Engagement” in Examinations of Transfer-Pricing Issues

By Patricia C. Chaback, E.A., San Francisco; Richard Fultz, J.D., LL.M., Washington; and Carlos M. Mallo, Ph.D. (Economics), Washington

Editor: Michael Dell, CPA

Practice & Procedures

On Aug. 12, 2014, the IRS Large Business & International (LB&I) division released general guidelines and rules of engagement for LB&I examiners employed in the Transfer Pricing Practice (TPP) and the International Business Compliance unit (IBC) involved in the examination of transfer-pricing issues.

Rather than assigning "control" of transfer-pricing issues to either group, the document states that it is "imperative that TPP and IBC work transfer pricing issues together, as a unified team." It further stresses that "the IBC and TPP management teams . . . have joint responsibility for the national transfer pricing inventory." In case of disagreements, issues will be elevated to the next level of management and decided, in every case, consonantly with "the best answer from the standpoint of the U.S. government." This new document should be understood as a complement to the transfer-pricing audit road map released last year.

Detailed Discussion

Last year's road map was organized around a basic 24-month audit timeline, breaking down a transfer-pricing audit into three phases: planning, execution, and resolution. The core team members in all three phases always included TPP personnel, which suggested a more substantial involvement, and the appearance of more "control" over the examination of transfer-pricing issues by the TPP than the IBC. Such an approach would have not been without merit, as TPP personnel frequently have broader expertise in the transfer-pricing arena.

The recently released rules of engagement, on the other hand, favor a more collaborative approach between IBC and TPP team members. Moreover, the rules of engagement explain that, "in many or even most cases, the TPP, as a result of its limited resources, will have no involvement in the day-to-day management of the issue." The roles and levels of engagement of TPP personnel will vary from case to case and from phase to phase. Therefore, TPP's roles and levels of engagement are described as a flexible and dynamic approach that allows for changes and adjustments during the lifecycle of the audit.

IBC and TPP management have joint responsibility for the national transfer-pricing inventory; the general guidelines, however, mandate that the TPP "must have visibility into the entire inventory." Despite this being a reasonable approach, only time will tell whether the two groups will follow the mandate in practice.

Levels of TPP Involvement

Consistent with the sometimes limited role of TPP in the examination of transfer-pricing issues, the general guidelines describe three levels of involvement: extensive, moderate, and limited. Under the extensive involvement scenario, TPP plays a "direct, continuing and significant role in the day-to-day management and execution of the examination." Consequently, TPP is a full member of the exam team. Under the moderate involvement scenario, TPP team members will regularly interact with the IBC team, assisting in "any substantive interactions with the taxpayer and any significant strategic decisions." Finally, under the limited involvement scenario, the TPP participation will be confined to assisting on an "ad hoc basis."

Because TPP involvement may vary depending on the circumstances surrounding an audit, Appendix A of the rules of engagement describes the sequencing steps IBC and TPP should take once an agreement is reached that a more thorough transfer-pricing review is necessary. This may occur at the outset of the case or during the course of the examination.


The rules of engagement contained in the memo highlight the importance of taxpayers' requesting, during the planning stages of an audit, identification of all the individual team members and their respective management chains. If a TPP member or members are identified as part of the exam team, it is also fair from a planning perspective for taxpayers to inquire if the exam team anticipates extensive or moderate involvement by the TPP.

When the IRS made the road map public in February 2014, it appeared that the TPP would be assuming a greater, perhaps prominent, role in the decisions being made on transfer-pricing issues at the IRS. With the issuance of the new rules of engagement, there now seems to be a greater balance between the functions of IBC and TPP calling for closer collaboration and emphasizing that no one team or individual controls the issue.

A version of this item appeared in Ernst & Young's International Tax Alert.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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