Tax Administration

Under an advance pricing agreement (APA) program, the Internal Revenue Service (IRS) and taxpayers agree on the methods to determine the prices that related companies charge each other when transferring goods and services over a specific period. Unilateral APAs are between IRS and specific taxpayers; bilateral APAs concern negotiations with tax authorities in foreign countries that have income tax treaties with the United States. Taxpayers agree to submit annual reports that demonstrate compliance with terms of the agreement. According to an IRS official, most taxpayers in the program were large corporations spread across many industries. As of September 1999, 10 percent of the 1,245 large corporate taxpayers with international related parties had an approved agreement or one pending. This 10 percent accounted for 42 percent of the dollar value of the intercompany transactions. IRS did not consistently meet its timeliness targets for processing unilateral APAs and the first phase of bilateral APAs. Of the 211 annual reports reviewed between October 1995 and September 1999, only 15 reports involving 11 taxpayers caused IRS to adjust or consider adjusting tax returns.

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

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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