4.60.8  International Examination and Processing Procedures

Manual Transmittal

June 05, 2014

Purpose

(1) This transmits revised IRM 4.60.8, International Procedures, International Examination and Processing Procedures.

(2) This IRM provides guidance and technical information on examination and processing procedures pertaining to international issue cases.

Material Changes

(1) IRM 4.60.8.2 was changed to update procedures and responsibilities of International Examiners (IEs) including international examiner awareness of taxpayers that have a designation of Potentially Dangerous Taxpayers (PDTs) and information on Caution Upon Contact (CAU) as referenced in IRM Sections 25.4.1 and 25.4.2 respectively.

(2) IRM 4.60.8.3 and its subsections was changed to provide expanded guidance on special situations including procedures on Exchange of Information Cases (EOI), Competent Authority Cases, and Advanced Pricing Mutual Agreement (APMA) Cases. Changes to IMS and ERCS procedures on APMA cases are also included.

(3) Editorial changes made throughout.

(4) Introduction of the Transfer Pricing Practice (TPP) teams and their involvement with examiners on examining transfer pricing issues.

Effect on Other Documents

This IRM supersedes IRM 4.60.8 dated September 14, 2006.

Audience

LB&I, SB/SE, TEGE management and examiners.

Effective Date

(06-05-2014)

Sergio Arellano
Director, International Business Compliance
Large Business and International Division (LB&I)

4.60.8.1  (06-05-2014)
Examination and Processing Procedures

  1. This chapter provides general instructions to the International Examiner (lE) regarding his or her responsibilities, the responsibilities of the domestic agent, and their shared responsibilities, in examining issues with international aspects.

4.60.8.2  (06-05-2014)
IE Responsibilities on International Feature Cases - In General

  1. LB&I IEs generally derive their examination workload from sources that include, though are not limited, to:

    1. LB&I Coordinated Industry Cases (CIC).

    2. Referrals from LB&I domestic examiners on Coordinated Industry Cases (CIC) and Industry Cases (IC). Referrals could be for corporations, partnerships, individuals, trusts or other taxpayers.

    3. Referrals from SB/SE domestic examiners. Referrals could be for corporations, partnerships, individuals, trusts or other taxpayers.

    4. Consultation assignments. In certain instances it may be necessary for the domestic examiner to audit and develop an issue with international aspects. The IE will provide consultation, auditing, and technical assistance to the domestic examiner to develop the issue.

    5. Situations where an International group controls the case. This can happen when domestic LB&I or SB/SE has accepted a return as filed during classification; however, the International classifier selected the return for examination. It is not unusual for the scope of these examinations to be limited to the package audit and international issues. Regular audit procedures, scope limitation guidelines, mandatory audit requirements, etc. apply to cases controlled by IEs. See IRM 4.46, LB&I Examination Process as well as other relevant sections of part 4 of the IRM and the LB&I website for audit and case control procedures, mandatory audit requirements and other pertinent information.

  2. The IE assigned to referrals will work with the domestic examiner throughout the examination as required for development of international aspects of the case. The type of case, the taxpayer and other factors will dictate how the international portion of the examination is conducted. The IE should discuss the audit with the domestic examiner. This discussion should include audit expectations, audit timeline and the role of the IE. Any differences of opinion, disagreements, scheduling problems, etc., should be addressed with the domestic examiner as soon as they are identified. If they can not be resolved, the IE should discuss the situation with their manager.

    1. The IE will prepare a risk analysis and audit plan for the international portion of the examination. The risk analysis should include consideration of emerging issues. After the risk analysis and audit plan are approved by the IE manager, a copy will be provided to the domestic examiner. The IE will also prepare a mid-cycle risk analysis and a copy will be provided to the domestic examiner after it is approved by the IE manager. The IE will also prepare an IC Audit Time Line for IC cases and provide a copy to the domestic examiner after it is approved by the IE manager.

    2. The IE will request, evaluate, analyze, and interpret information obtained. The IE should promptly issue, or ensure, that the domestic examiner issued the mandatory transfer pricing IDR. Early in the audit planning, the IE should consider whether the taxpayer’s international tax preparation software should be requested.

    3. The IE will make reasonable efforts for an expeditious completion of the international phase of the examination. The IE should advise the domestic examiner if it appears that the planned completion date will not be met.

    4. The IE will work with the domestic examiner to coordinate audit work and scheduling, taxpayer interaction, IMS input and report preparation.

    5. The IE will work with the domestic examiner and other team members as appropriate to secure information and will keep them informed regarding potential issues, problems, etc.

    6. The IE will keep the IE manager informed and involved regarding significant issues, audit problems and any other significant matters that impact the international portion of the audit.

  3. Discussions with taxpayers, or their representatives, about the international portion of the examination or potential adjustments in the international area, should be coordinated with the domestic examiner. In some instances it may be appropriate to involve the domestic manager and/or the IE manager in the discussions. The domestic examiner should involve the IE in issue resolution discussions and the IE manager should be advised of any disagreements between the IE and the domestic examiner. International examiners are cautioned when dealing with the public to be aware of Potentially Dangerous Taxpayers (PDTs) and to follow Caution Upon Contact (CAU) procedures as provided in IRM 25.4.1 and IRM 25.4.2 respectively.

  4. The IE is responsible for the following:

    1. The final development of the international aspects of the case. If a difference of opinion arises between the domestic examiner and the IE, they will try to resolve the difference. If the difference is not resolved among themselves, it will be taken to the next higher management level.

    2. The preparation of an International Examiner’s Report (see IRM 4.60.9 ) . After review by the IE manager, the report will be sent to the domestic examiner.

    3. The IE will be available for discussions with the taxpayers, or their representative, concerning the adjustments in cases where an IE’s recommendation results in an adjustment being proposed.

  5. See the examination procedures in IRM 4.46.3.9.10 concerning specialist participation in team audits.

  6. In those situations where there is no domestic examiner assigned to a case, e.g., where the scope of the audit is limited to international issues or where an IE is working both the international and domestic issues, the International Team Manager will have full jurisdiction over the case and responsibility for paragraphs (2) – (5), above as applicable.

4.60.8.3  (06-05-2014)
IE Responsibilities on International Feature Cases - Special Situations

  1. This subsection provides Special Situations that International Examiners may encounter.

4.60.8.3.1  (06-05-2014)
Exchange of Information Cases

  1. International Examiners (IE's) may be contacted by IRS Exchange of Information (EOI) personnel from the offices of the Program Manager, Exchange of Information in Washington, DC, the overseas Tax Attachés, or the Joint International Tax Shelter Information Centre (JITSIC) to assist with EOI requests initiated by foreign jurisdictions per the provisions of an income tax treaty or Tax Information Exchange Agreement (TIEA). IE's may also initiate, through the jurisdictional EOI Office, an EOI request for information from a foreign jurisdiction per a treaty or TIEA. Detailed procedures for IE's to follow in these situations can be found inIRM 4.60.1 Exchange of Information.

4.60.8.3.2  (06-05-2014)
Competent Authority Cases

  1. The United States may enter into a tax convention or treaty with another country to limit each contracting state's tax jurisdiction in order to avoid international double taxation. Treaties provide a process, the mutual agreement procedure (MAP) that gives the contracting states a mechanism to resolve double taxation cases and other problems arising from the operation of a tax treaty. Rev. Proc. 2006-54 (and any successor revenue procedure) sets forth the procedures by which taxpayers may obtain assistance from the U.S. competent authority under the provisions of a tax treaty to which the United States is a party. International Examiners (IE's) may be contacted by personnel from the Treaty Assistance and Interpretation Team (TAIT) or the Advanced Pricing and Mutual Agreement (APMA) organizations regarding cases involving mutual agreement procedures. Detailed procedures for IE's with these situations can be found in IRM 4.60.2

4.60.8.3.3  (06-05-2014)
Advance Pricing Agreement (APA) Cases

  1. . An APA is an agreement between a taxpayer and the IRS for a prospective term of years by which the IRS agrees not to make any adjustments under IRC section 482 for transactions covered by the APA if the taxpayer files its return consistent with the agreed transfer pricing methodology (TPM) set forth in the APA.

  2. The APA process for the IRS is handled by a team of IRS personnel that includes an APA Team Leader, an economist, an IE, and a field counsel participant. In bilateral cases, a competent authority analyst must also be part of the team.

  3. The IE, along with each of the other team members, is expected to participate in meetings, to review taxpayer submissions, and to participate in both internal discussions and in discussions with the taxpayer to seek agreement on a transfer pricing method. In short, the IE is expected to be a full member of the APA team. The amount of actual involvement will vary from case to case, often depending on the IE's experience with the taxpayer.

  4. The IE is expected to participate as a full member of the IRS APA team. The IE is expected to participate in internal and taxpayer meetings, including pre-filing conferences, initial post- submission meetings and subsequent meetings. The IE is expected to review all taxpayer submissions, including the initial APA request and subsequent submissions. Additionally, the IE is expected to assist the full team in its analysis of the taxpayer's information and in its formulation of a reliable transfer pricing method.

  5. Refer to the APMA site on irs.gov for further information.

4.60.8.3.3.1  (06-05-2014)
Forming the APA Team

  1. The Advance Pricing Mutual Agreement (APMA) program and LB&I have established procedures for requesting IEs for APA teams. The APMA Team Leader should use the list of International Referral Recipients at http://lmsb.irs.gov/international/dir_compliance/compliance/auto-referral.asp to identify who in LB&I should receive the request for IE services. The site identifies where International referral requests are to be sent based on the taxpayer’s industry and the location of the taxpayer’s books and records.

  2. The APMA Team Leader is to provide the IRR with the request for the IE and name of the taxpayer and, if known, the location of the audit team by phone, fax or encrypted e-mail. The APMA Team Leader will serve as the IRR’s point of contact in the APMA program for the case. The IRR will forward the request to the appropriate International Team Manager within five business days. Upon the receipt of the request, the Team Manager will assign an IE to the case and notify the APMA Team Leader, who will then forward a copy of the APA submission to the IE.

  3. If the APMA Team Leader already knows the IE assigned to the audit of the taxpayer before the APA team is formed, the APMA Team Leader may contact the IE to forward directly the APA request materials while simultaneously notifying the IRR of the coordination request.

  4. Other APA team members may be added at the suggestion of the IE.

4.60.8.3.3.2  (06-05-2014)
Coordinating Technical Issues

  1. If the APA request raises complex or novel international tax issues requiring technical coordination, the APMA Team Leader is to brief APMA management to determine whether requesting assistance from a technical branch in the Office of Associate Chief Counsel (International) is appropriate.

4.60.8.3.3.3  (06-05-2014)
Case Closing Procedures

  1. On receiving the executed APA from the taxpayer, the APMA Team Leader will complete the APA annual statutory report survey form and close the case file within one week.

  2. The APMA Team Leader is responsible for reviewing the case file to ensure it is complete.

4.60.8.3.3.4  (06-05-2014)
IMS Procedures in APA Cases

  1. APA case requests (initial and renewal submissions) are to be added to IMS with the specific case name by establishing the APA on IMS using the procedures to create a manually entered return. It is suggested that "APA" be added following the taxpayer’s name to easily identify that the case is an APA case.

  2. SAIN 706 (Pricing Issues) is to be used when creating the APA case. The UIL code should begin with 9411.xx or 9422.xx, with the balance of the code based on the methodology being used for the respective APMA

  3. When manually creating the APA case, select the APA - Advanced Pricing Agreement as the cycle type in the "Case Attributes" screen.

  4. APA cases will be entered in the manual return information screen with an MFT A0 and an Activity Code of 507.

  5. After entering the return details, complete the applicable information in the "Miscellaneous Return Data" screen such as foreign controlled entity, applicable country code, and foreign ownership percentage.

  6. In addition to the IE, the IE manager, the field economist (if one is assigned), the field economist manager and any other field personnel assigned to the APA team and/or will be charging time for work on the APA, must be added as team members in the "IRS Team Member" screen.

  7. The "Issues Attributes Globalization" screen must be completed for every international issue added to IMS so the respective country code can be entered.

  8. APMA will do a limited review of the Annual Reports to determine the taxpayer's compliance with the APA terms. If they conclude that the taxpayer is in compliance, they will forward to the field the annual report and a memorandum of Notification of Annual Report Review Completion. The field then has the discretion whether to do its own review or examination of the taxpayer's compliance with the terms of the APA. If the field determines there are concerns with compliance, they would need to contact APMA within 90 days from the date of the memorandum Notification of Annual Report Review Completion, otherwise, APMA will consider the annual report review closed.

  9. Time spent reviewing APA annual reports is to be charged directly to Activity Code 507.

  10. There will not be an open case on IMS for annual report reviews.

4.60.8.3.3.5  (06-05-2014)
ERCS Procedures in APA Cases

  1. Time spent working on all APA activity (submissions and review of annual reports) can be directly charged to activity code 507. They do not need to be added to ERCS by the specific case name.

  2. Although not required, APAs can be established on ERCS. Instructions are in Chapter 3 of the ERCS Group Handbook. The APA entity data is as follows:

    1. Case Name (i.e. X Corp APA)

    2. EIN

    3. MFT A0, (0 is a numeric not an alpha character)

    4. Activity code 507, and

    5. Tax period- the last tax period in the recommended APA term (example, if term is 200712-201112, use 201112 for the APA tax period on ERCS. Just the one tax period on ERCS is sufficient to track that specific APA.

  3. Economists and domestic agents can be added to ERCS by their team managers through the "Multiple Examiner" screen in order to charge time to the APA on ERCS.

  4. Once the final APA agreement is signed (after the APA has been through Competent Authority), the APA can be closed off ERCS.

  5. Refer to IRM 4.60.9.8 for use of proper Status Code and Aging Reason Code.

4.60.8.3.4  (06-05-2014)
Pre-Filing Agreement (PFA) Program Cases

  1. LB&I taxpayers may use the PFA program to request the examination and resolution of specific issues prior to filing a tax return. The PFA program allows any LB&I taxpayer to request an examination for any taxable year for which a return is not yet due and is not yet filed (including a return for which the due date has been extended), and for up to four future taxable years.

  2. The Service will consider entering into a PFA on any issue unless specifically excluded (see IRM 4.60.8.5(6) below) that requires either a determination of facts or the application of well-established legal principles to known facts. The Service also will, in general, consider entering into a PFA regarding a methodology used by a taxpayer to determine the appropriate amount of an item of income, allowance, deduction, or credit.

  3. There is no list of eligible domestic and international issues. Any domestic or international issue that requires either a determination of facts or application of well established legal principles to known facts and that is not excluded under section 3.08 or 3.09 of Rev. Proc. 2009-14 is likely suitable for a PFA.

  4. In addition to paragraphs (2) and (3), the following issues are likely suitable for PFA, but also require that the Associate Chief Counsel (International) concur with both, the acceptance of the issue into the PFA program and execution of the PFA. Even though an issue in a particular case may appear on this list, the Service and/or the Associate Chief Counsel (International) may, in its sole discretion, refuse to address that issue based on considerations of sound tax administration. The eligible issues are:

    1. whether a unit of the taxpayer’s trade or business is a qualified business unit within the meaning of IRC 989(a) and the regulations promulgated under that section;

    2. whether the taxpayer is engaged in a trade or business within the United States (excluding questions under IRC 864(b)(2) );

    3. the amount of gross income that is effectively connected with the conduct by the taxpayer of a trade or business within the United States;

    4. factual determinations concerning the extent to which, under IRC 882(c) , deductions are connected with income that is effectively connected with the taxpayer’s conduct of a trade or business within the United States; and

    5. whether the taxpayer has a permanent establishment in the United States for purposes of a bilateral income tax convention to which the United States is a party and, if so, what profits are attributable to that permanent establishment.

  5. In addition to the generally applicable provisions of Rev. Proc. 2009-14, the following special provisions apply to any request for a PFA on an issue with international implications:

    1. A PFA and any factual information contained in the background files is subject to exchange of information under income tax treaties or tax information exchange agreements in accordance with the terms of such treaties and agreements. Information may be exchanged to the extent consistent with sound tax administration and the practices of the relevant foreign competent authority.

    2. To minimize taxpayer and governmental uncertainty and administrative cost, taxpayers who seek a PFA on an international issue are encouraged to seek competent authority consideration under the mutual agreement procedure of any applicable United States income tax convention. This consideration will be given after the PFA is concluded, and the PFA may be modified to reflect the outcome of the mutual agreement procedure.

    3. A taxpayer may request a PFA for an international issue that is the subject of a previously submitted request for competent authority assistance. The consideration of this competent authority request will not be suspended during the PFA process. If the taxpayer requests a PFA and the previously submitted request for competent authority assistance is ongoing, if appropriate, the taxpayer also should make a request for the Accelerated Competent Authority Procedure of Rev. Proc. 2002-52, 2002-2 C.B. 242 .

  6. The Service will not enter into a PFA with respect to thirteen types of issues:

    1. transfer pricing issues (see Rev. Proc. 2004-40, 2004-2 C.B. 50) (Advance Pricing Mutual Agreement program);

    2. except as provided in section 3.09 of Rev. Proc. 2007-17, issues involving a change in accounting method (see Treas. Reg. §1.446-1(e));

    3. issues involving the annual accounting period (see Treas. Reg. §1.442-1);

    4. issues of reasonable cause, due diligence, good faith, clear and convincing evidence, or any other similar standard under Subtitle F (Procedure and Administration) of the Internal Revenue Code;

    5. issues involving the applicability of any penalty or criminal sanction;

    6. issues that are, or will be, the subject of a pending or proposed request for a determination letter, technical advice memorandum, or letter ruling issued to or regarding the taxpayer;

    7. issues for which the taxpayer proposes a resolution that is contrary to a private letter ruling, determination letter, technical advice memorandum, or closing agreement previously issued to or regarding the taxpayer;

    8. issues for which the taxpayer proposes a resolution that is contrary to a position proposed by the Service in response to a request for a private letter ruling or determination letter that was withdrawn by the taxpayer;

    9. issues that are the subject of pending litigation between the Service and the taxpayer for an earlier taxable year

    10. issues designated for litigation for an earlier taxable year of the taxpayer by the Office of Chief Counsel;

    11. issues that involve a tax shelter described in IRC 6662(d)(2)(C)(ii);

    12. issues that require the Service to determine whether the taxpayer, rather than another entity, is the common law employer; and

    13. issues relating to transactions that have not yet occurred, regardless of whether the issue otherwise would qualify as one on which the Service will issue letter rulings or other forms of written guidance as described in Rev. Proc. 2014-1 I.R.B.1, and successor revenue procedures.

  7. The LB&I Office of Pre-Filing and Technical Guidance (PFTG) provides guidance and oversight of the PFA program. LB&I Industry Directors, coordinating and consulting with the Associate Chief Counsel having jurisdiction over the issues presented by the PFA request, are responsible for determining which taxpayers to accept into the program, for developing individual PFAs, and executing finalized PFAs.

  8. The decision regarding the acceptance of any PFA involving an international issue also will require the concurrence of the Director of International Business Compliance and the Deputy Commissioner (International) LB&I.

  9. Detailed information and procedures for the PFA program are set forth in Rev. Proc. 2007-17, 2007-4 I.R.B. 368, IRM 4.30.1 , and CCDM 32.4.2.

4.60.8.3.5  (06-05-2014)
IRC Section 6038A and 6038C Penalty Cases

  1. The specific procedures contained herein are applicable to IRC 6038A cases (25-percent foreign owned domestic corporations) and IRC 6038C cases (foreign corporations engaged in a U.S. trade or business).

  2. IRC 6038A provides two information gathering tools to assist an examiner in auditing foreign owned corporations:

    1. IRC 6038A(d) — a monetary penalty for the failure to furnish information (Form 5472) or maintain certain records in the United States.

    2. IRC 6038A(e) — a noncompliance penalty for the failure to authorize a reporting corporation to act as agent or for noncompliance with IRS summons.

  3. The monetary penalty and the noncompliance penalty may be applied independently or concurrently in appropriate cases.

  4. In order to properly apply the provisions of IRC 6038A, there are several procedural steps for an examiner to follow. Some will necessitate coordination of activities with the LB&I Technical Specialist for International Penalties and/or IRS Counsel.

  5. Be aware that IRC 6114 requires disclosure whenever a taxpayer, with respect to any tax imposed, takes the position that a treaty of the United States overrules or modifies an internal revenue law, subject to limited exceptions in the regulations.

4.60.8.3.5.1  (06-05-2014)
Delegation of Authority

  1. The Area Directors of SB/SE have delegated IRC 6038A penalty authority down to the GS-11 examiner. The LB&I Commissioner has delegated Internal Revenue Agents authority to sign Notification Letters – See Delegation Order LB&I-193-2.

4.60.8.3.5.2  (06-05-2014)
Coordination with Other Penalties

  1. For criminal penalties for the failure to file a return and filing a false or fraudulent return, see IRC 7203 and IRC 7206 . For the penalty relating to an underpayment of tax, see IRC 6662 .

4.60.8.3.5.3  (06-05-2014)
IRC Section 6038A(d) Monetary Penalty

  1. The monetary penalty applies when a reporting corporation fails to:

    1. File Form 5472 with the required information, effective for tax years beginning after July 10, 1989.

    2. Maintain records or cause another to maintain records of transactions with a related party, effective December 10, 1990.

    3. Comply with the non-U.S. maintenance requirements described in Treas. Reg. §1.6038A-3.

  2. The basic penalty is $10,000 for the failure to furnish information or maintain records in a taxable year. If the failure continue past 90 days after notice by the service, an additional penalty applies. An additional $10,000 penalty is imposed for such failure for each 30 day period (or fraction, thereof) during which the failure continues. There is no maximum to the continuation penalty.

4.60.8.3.5.4  (06-05-2014)
Failure to File Form 5472

  1. A reporting corporation must file a separate annual information return with respect to each related party with which it had reportable transactions. See Treas. Reg. §1.6038A-2.

  2. A reporting corporation is required to:

    1. Timely file a complete and accurate Form 5472 including all information regarding the related party and the reportable transactions.

    2. File Form 5472 by the due date of its income tax return, including extensions.

  3. Reporting corporations with less than $10,000,000 in U.S. gross receipts for a taxable year are not subject to the record maintenance and authorization of agent requirements. However, there is no exception to the requirement for filing Form 5472 or the general record maintenance requirements of IRC 6001 .

4.60.8.3.5.4.1  (06-05-2014)
Failure to File Procedures and Guidelines

  1. The examiner should determine if the monetary penalty for the failure to furnish information should be applied on audit.

    1. Review tax returns for Forms 5472.

    2. Query via Information Document Request (IDR) if the taxpayer filed all necessary Form 5472 with the tax return.

    3. Consider application of penalty to all years in which there was a failure to furnish information or maintain records.

    4. Review Civil Penalty Procedures covered in IRM 20.1.9, International Penalties.

    5. Look to Treas. Reg. §1.6038A-2(f) for exceptions.

    6. Obtain IDRS transcripts to determine if a monetary penalty has been assessed by the campus.

4.60.8.3.5.4.2  (06-05-2014)
Failure to Maintain Records or Comply with Non-U.S. Maintenance Requirements

  1. A reporting corporation must maintain or cause another to maintain certain records within the United States. See Treas. Reg. §1.6038A-3(a). For a large volume of records, scheduled production may be permitted. The taxpayer should ask for a scheduled production within 30 days of the Service’s request for records.

  2. A reporting corporation may negotiate and enter into a record maintenance agreement with the LB&I Director of Field Operations or the SB/SE Area Director that has audit jurisdiction over it. This agreement establishes which records must be maintained, by whom, how they must be maintained, and the period of record retention. See Treas. Reg. §1.6038A-3(e). Rev. Proc. 91-38,1991-2 C.B. 629 provides procedures for requesting an IRC 6038A agreement under Treas. Reg. §1.6038A-3(e).

  3. In some circumstances a reporting corporation may maintain certain records outside the United States. See Treas. Reg. §1.6038A-3(f). However, an LB&I Director of field Operations, or SB/SE Area Director, may with the concurrence of the Deputy Commissioner (International) LB&I require, for cause, the maintenance within the United States of any foreign- based records. This may occur if there exists a clear pattern of failure to maintain or timely produce the records.

4.60.8.3.5.4.3  (06-05-2014)
Record Maintenance Procedures and Guidelines

  1. The examiner should determine if the taxpayer has properly maintained the appropriate records in the U.S.

    1. Review all authorizations to determine the correct entity or person acting as agent for a foreign related party.

    2. See Treas. Reg. §1.6038A-3(c) which covers the specific records to be maintained for safe harbor.

    3. Obtain a complete listing of all foreign maintained records during the early stages of the examination.

    4. Issue IDRs to the reporting corporation on its own behalf for the relevant records over which it has possession, custody, or control. Records must be produced within 30 days. A second set of IDRs should be issued to the reporting corporation as agent for the foreign related party for the relevant records over which it has possession, custody, or control. Records must be produced within 60 days.

      Note:

      Monitor requests to ensure that the times specified in the regulations are met.

    5. Request that any documents in a foreign language be translated into English consistent with the rules in Treas. Reg. §1.6038A-3(b).

    6. Review record maintenance agreements prior to implementation to ensure that all relevant records will be maintained.

  2. For coordination with exchange of information requests, see IRM 4.60.8.3.5.10.

  3. On-site examinations can provide an additional means of obtaining non-U.S. maintained records.

4.60.8.3.5.5  (06-05-2014)
Reasonable Cause

  1. Reasonable cause can only apply to excuse the monetary penalties. The reporting corporation must make an affirmative showing of all the facts alleged as reasonable cause for such failure, written under penalties of perjury. See Treas. Reg. §1.6038A–4(b).

    Note:

    The beginning of the 90-day period described in IRC section 6038A(d) for monetary penalties shall not begin earlier than the last day on which reasonable cause existed.

  2. The Director, Compliance Services, may grant relief for reasonable cause for failure to file Form 5472 for penalties asserted by a campus.

  3. The responsible LB&I Director of Field Operations or SB/SE Area Director, Compliance, may grant relief for reasonable cause for failure to file Form 5472, maintain records, and produce non-U.S. based records for penalties asserted by Compliance.

4.60.8.3.5.6  (06-05-2014)
Application of the Monetary Penalty

  1. The imposition of the monetary penalty is detailed in Treas. Reg. §1.6038A-4. Certain basic procedures are given below.

    1. Set forth in writing the reasons for imposing the monetary penalty.

    2. Provide reporting corporation with proper notice of failure(s). See Pattern Letters that may be used for this purpose. The pattern letter should be issued as soon as potential failure exists. The pattern letter starts the 90-day response period.

    3. Assess the basic penalty and assess additional penalties for continued failure(s) following the non-deficiency penalty procedures outlined in IRM 20.1.9 , International Penalties.

4.60.8.3.5.7  (06-05-2014)
IRC Section 6038A(e) Noncompliance Penalty

  1. IRC 6038A(e) provides a noncompliance penalty that applies in the event the reporting corporation:

    1. Fails to submit an Authorization of Agent within 30 days of request by the service.

    2. Does not substantially and timely comply with a summons.

  2. The noncompliance rule allows the Service, in its sole discretion, to determine the amount of deduction paid or accrued in connection with the related party transaction or the cost of any property acquired or transferred in such transaction based on information obtained through testimony or otherwise.

  3. Associate Chief Counsel (International) must be informed of any potential noncompliance penalty per IRC section 6038A. Contact the LB&I Technical Specialist for International Penalties and/or IRS Counsel in all cases where a potential noncompliance penalty exists.

4.60.8.3.5.8  (06-05-2014)
Failure to Obtain Authorization of Agent

  1. A reporting corporation must provide an Authorization of Agent within 30 days of a request.

    Note:

    Neither the statute nor the regulations authorize any limitation or changes to the authority to act as agent. Therefore, none can be accepted.

    Note:

    Once obtained, the Authorization of Agent applies to all open years.

  2. The time at which an Authorization of Agent is requested is within the discretion of the Service controlling the case. It may be:

    1. At a preaudit conference;

    2. When IDRs are not satisfactorily answered;

    3. When complete cooperation is not provided; or

    4. When the U.S. reporting corporation cannot provide the documents because they are under the custody and control of a foreign related party.

    5. Never, if IDRs are satisfactorily answered.

  3. When multiple foreign related parties are in the same foreign affiliated group, the reporting corporation may provide a single consolidated Authorization of Agent for multiple members of the group, as detailed in Treas. Reg. §1.6038A-5(c). Alternatively, separate Authorizations of Agent may be provided for each foreign related party. See Treas. Reg. §1.6038A-5(b)(1). In addition, authorizations of agent may be provided using a combination of these methods.

    Note:

    An examiner should issue the various Authorization of Agent forms to the U.S. reporting corporation along with a list of related parties for which the Service is requiring a signed Authorization of Agent. It is up to the foreign parent whether or not to sign one authorization for all covered parties or submit separate authorizations for each related party.

  4. AOA procedures should be discussed at every opening conference involving 6038A reporting corporations. An agreement should be reached with the taxpayer that they attest all needed records are available in the US or we will request the AOA at the beginning of the examination.

4.60.8.3.5.9  (06-05-2014)
Failure to Comply with IRS Summons

  1. The noncompliance penalty may apply if the reporting corporation, either directly or indirectly as an agent of a related party, fails to produce records or testimony and fails to substantially and timely comply with a summons.

  2. The penalty may also apply if the summons is quashed by reason of the reporting corporation’s failure to maintain or cause another to maintain records.

    Note:

    The LB&I Director of Field Operations is not required to begin proceedings to enforce the summons in order to impose the noncompliance penalty.

4.60.8.3.5.10  (06-05-2014)
Coordination with Treaties and TIEAs

  1. If efforts to secure the records on a voluntary basis do not prove successful, the IRS can make an EOI request for records that are located in a foreign jurisdiction with which the United States has an income tax treaty or Tax Information Exchange Agreement (TIEA).IRC 6038A may require that such EOI procedures be followed prior to issuing an IRC §6038A summons. See IRM 4.60.8.3.5.10.1 and IRM 4.60.8.3.5.10.2 below for details.

  2. The term "partner jurisdiction" as used herein generally refers to any foreign tax jurisdiction with which the United States has an income tax treaty or TIEA. The term "non-partner jurisdiction" refers to any foreign tax jurisdiction with which the United States does not have an income tax treaty or TIEA.

4.60.8.3.5.10.1  (06-05-2014)
When an EOI Request is Not Required

  1. An EOI request is not required when:

    1. Records sought relate to direct transactions between the U.S. subsidiary of a foreign parent located in a partner jurisdiction and a foreign related party located in a non-partner jurisdiction.

    2. Records sought relate to a foreign branch of a foreign-controlled U.S. subsidiary (even if the branch is located in a partner jurisdiction) because the branch is not a separate entity and the records are in the possession, custody, or control of the U.S. subsidiary.

    3. Records cannot be obtained in a timely and efficient manner, such as when the EOI request would take more than 180 days.

4.60.8.3.5.10.2  (06-05-2014)
When an EOI Request May be Required

  1. An EOI request may be required when records sought relate to indirect transactions between the foreign related party located in a non-partner jurisdiction and the foreign parent located in a partner jurisdiction (e.g., information of the type as described in Treas. Reg. §1.6038A-3(b)). When records of a related party are obtainable in a timely and efficient basis under the EOI provisions of a tax treaty or (TIEA), the IRS will generally make use of such procedures before issuing a summons. Information is deemed available in a timely and efficient manner if it can be obtained within 180 days of the request. See IRM 4.60.1 Exchange of Information, for specific EOI procedures.

4.60.8.3.5.11  (06-05-2014)
Summonsing Records

  1. An IRC 6038A Summons may be enforced only with respect to the person who:

    1. has possession, custody, or control over the records being sought; or,

    2. is acting as the agent for a foreign related party that has possession, custody, or control over the records.

  2. In many instances, records may be similar (e.g., the originator of correspondence will have a copy of the original document and the recipient will have possession of the original document). Both the original and the copy:

    1. May be important for verification purposes or in the event any notes were added to the document.

    2. May be requested in an IDR and in a summons from the person that has possession, custody, or control of the particular document.

  3. Generally, a pending EOI request for records will not preclude the issuance of a pre-summons letter nor an IRC 6038A summons for records, following summons procedures in IRM 25.5.5, either to the reporting corporation on its own behalf or to the reporting corporation as agent for the foreign related party. Information no longer needed because it was provided under an EOI request should not be included in a subsequent IRC 6038A summons.

  4. Simultaneous use of an EOI request and an IRC 6038A summons is recommended where warranted.

  5. When an EOI request is outstanding, additional coordination is needed for an IRC 6038A summons. The case manager will forward the IRC 6038A summons request to the LB&I International Technical Specialist for International Penalties and/or IRS Counsel, who will forward it to Associate Chief Counsel (International) for review and approval before it may be issued. The case manager will be notified in writing when the request has been approved.

4.60.8.3.5.11.1  (06-05-2014)
Summonsing Testimony

  1. In addition to records, an examiner may also request testimony.

    1. Before requesting testimony from an officer or any other employee of a foreign corporation, every attempt must be made to obtain the information from a U.S. person.

    2. If testimony will be requested of an officer or any other employee of a foreign corporation, under IRC 6038A(e), the language to appear on the summons should be reviewed and approved by Associate Chief Counsel (International).

    3. If a summons is for both records and testimony, the entire summons will be forwarded to Associate Chief Counsel (International) who will review only the portion dealing with testimony. The examiner should consider separate summonses in order not to cause a delay in the production of records.

4.60.8.3.5.12  (06-05-2014)
IRC Section 6038A(e) Procedures and Guidelines

  1. The examiner should request the Authorization of Agent from the reporting corporation exactly as set out in Treas. Reg. §1.6038A-5. If the reporting corporation fails to provide it timely, formal notice of such failure must be sent to the reporting corporation before imposing the penalty.

    1. .The examiner should issue the pattern letter for failure to submit an executed Authorization of Agent. The examiner should contact a Technical Specialist on the Information Gathering IPN and/or IRS Counsel with any questions regarding this process.

    2. Notices must be sent by certified or registered mail.

  2. In order to impose the noncompliance penalty for failure to furnish information under an IRS summons, the examiner must make a proper summons request.

    1. Issue IDRs for records or testimony.

    2. Consider issuing a pre summons letter request following the procedures in IRM 25.5.5 when the reporting corporation has not substantially complied with the IDR requests. The suggested procedure is to use a cover letter with attachments.

    3. Issue Summons Form 2039 following the procedures of IRM 25.5.5.

    4. Address the "to" line of Form 2039 as issued to the reporting corporation "as agent for related parties " and annotate the Form 2039 with the words "IRC section 6038A summons."

    5. Allow sufficient time for summons enforcement; at least nine months must be left under the statute of limitations.

    6. Have the proposed summons reviewed and approved by the LB&I Technical Specialist for the Information Gathering IPN, who will coordinate with Associate Chief Counsel (International)

      Note:

      ASAT Inc. v. Commissioner, 108 TC 147(1997), illustrates the application of the IRC 6038A(e) provisions and helps to define the role of expert witnesses.

4.60.8.3.5.13  (06-05-2014)
Application of the Non-Compliance Penalty

  1. The imposition of the noncompliance penalty is detailed in Treas. Reg. §1.6038A-7. Certain basic procedures are given below.

    1. Set forth in writing the reasons for imposing the noncompliance penalty.

    2. Provide the reporting corporation with proper notice of failure. See Pattern Letter for formal notice.

      Note:

      Before issuing the notice, refer the case to the LB&I Technical Specialist for the Information Gathering IPN and/or IRS Counsel, who will forward to Associate Chief Counsel (International).

    3. Reflect the adjustment to the deduction or cost in the Statutory Notice of Deficiency as directed in Treas Reg. §1.6038A–7 after the formal notice has been sent.

    4. Follow the deficiency penalty procedures outlined in IRM 20.1.9 .

      Note:

      There is no reasonable cause exception to this penalty.

4.60.8.3.5.14  (06-05-2014)
IRC 6038C Penalty

  1. The examiner should request the Authorization of Agent from the reporting corporation exactly as set out in Treas. Reg. §1.6038A-5. If the reporting corporation fails to provide it timely, formal notice of such failure must be sent to the reporting corporation before imposing the penalty.

    1. .The examiner should issue the pattern letter for failure to submit an executed Authorization of Agent. The examiner should contact a Technical Specialist on the Information Gathering IPN and/or IRS Counsel with any questions regarding this process.

    2. Notices must be sent by certified or registered mail.

  2. In order to impose the noncompliance penalty for failure to furnish information under an IRS summons, the examiner must make a proper summons request.

    1. Issue IDRs for records or testimony.

    2. Consider issuing a pre summons letter request following the procedures in IRM 25.5.5 when the reporting corporation has not substantially complied with the IDR requests. The suggested procedure is to use a cover letter with attachments.

    3. Issue Summons Form 2039 following the procedures of IRM 25.5.5.

    4. Address the "to" line of Form 2039 as issued to the reporting corporation "as agent for related parties " and annotate the Form 2039 with the words "IRC section 6038A summons."

    5. Allow sufficient time for summons enforcement; at least nine months must be left under the statute of limitations.

    6. Have the proposed summons reviewed and approved by the LB&I Technical Specialist for the Information Gathering IPN and/or IRS Counsel, who will coordinate with Associate Chief Counsel (International)

      Note:

      ASAT Inc. v. Commissioner, 108 TC 147(1997), illustrates the application of the IRC 6038A(e) provisions and helps to define the role of expert witnesses.

4.60.8.3.5.15  (06-05-2014)
IMS Procedures in Penalty Cases

  1. Penalty cases should be added to IMS with the specific case name by establishing the penalty case on IMS using the procedures to create a manual return.

  2. SAIN 802 – 03 with a secondary code of 90 is to be used when creating the penalty issue. Add an appropriate definition of the secondary SAIN such as "6038A Penalty" . If there are multiple penalties or multiple countries involved, additional secondary SAIN numbers will need to be used starting with 91. The UIL code should begin with 9660.xx... depending on the circumstances with the balance of the code being determined by the nature of the issue.

  3. When manually creating the penalty case, select the PC – Penalty Case 6038A - as the cycle type.

  4. Penalty Cases will be entered in the manual return information screen with an MFT P9 and an activity code of 506.

4.60.8.3.6  (06-05-2014)
Procedures Regarding Multi-Jurisdictional Cases

  1. Ordinarily, the division controlling the case has jurisdiction over the examination. This will ordinarily be the LB&I Industry or SB/SE Area in which the records and accounts of the corporation are maintained. However, appropriate arrangements will be made when the interest of the Government requires that jurisdiction be vested elsewhere. When providing services in the nature of a support audit, the results of the examination will be transmitted to the appropriate office.

4.60.8.3.7  (06-05-2014)
International Boycott Procedures

  1. All returns containing a Form 5713 (International Boycott Report) are part of the International Program.

4.60.8.3.7.1  (06-05-2014)
Referral Criteria and Procedures

  1. If a return is examined where no Form 5713 is filed and it is ascertained that Form 5713 should have been filed; the domestic examiner will refer the case to International through Specialist Referral System (SRS). Attach documentation such as copies of contracts, memorandums, invoices and other pertinent data used to ascertain that a Form 5713 should have been filed.

  2. The domestic examiner will continue the examination with respect to issues other than the filing of Form 5713, but will not close the case while the referral is pending.

  3. If the International Team Manager rejects the referral, the domestic examiner will continue the examination giving full consideration to the international boycott factors involved. If information is subsequently developed that indicates that an international boycott issue should be proposed, the domestic agent will submit another international referral.

4.60.8.3.7.2  (06-05-2014)
Examination Procedures

  1. The IE will develop an audit plan pertaining to the international boycott aspects of the examination and will evaluate, analyze, and interpret the information obtained. The IE may accompany and assist in obtaining the information pertaining to international boycotts.

  2. If a return to be examined contains a Form 5713 and a boycott determination from Chief Counsel was obtained by the taxpayer, the IE, will:

    1. Verify that the facts on the Form 5713 are correct.

    2. Verify that the representations upon which the determination was based reflect an accurate statement of the material facts and that the operation actually was carried out substantially as proposed.

    If the facts Then
    Are the same as the determination The IE will prepare Form 3963. See IRM 4.60.9
    Are not the same as the determination The IE will forward these findings to the National Office as provided for in Section 9.03 of Rev. Rev. Proc. 77-9, 1977-1 C.B. 542. Treat such reference to the National Office as a request for technical advice and follow the procedures of Rev. Proc. 2007-2 . Be aware that the revenue procedure is a published document that is annually revised. The IEs should continue to follow the current procedures for requesting technical advice from the National Office, in coordination with Area Counsel.
  3. In cases where the taxpayer did not request a determination, the IE will review and verify all relevant documents submitted by the taxpayer.

    1. If the fact situation in the case coincides with a published Treasury guideline on what constitutes participation in or cooperation with an international boycott, the IE will prepare an International Examiner’s Report (Form 3963) based on these findings. See IRM 4.60.9, International Examiner’s Report.

    2. If the fact situation in the case does not completely coincide with the published Treasury Guideline on what constitutes participation in or cooperation with an international boycott, the IE will consider the following:

    If Then
    Willing to request a determination The IE will coordinate with the domestic examiner in assisting the taxpayer in filing for a determination under Rev. Proc. 77-9 1977-1 C.B. 542. The IE will ensure that the current revenue procedure is followed.
    Not willing to request a determination The IE will coordinate with the domestic examiner in submitting a request for technical advice under Rev. Proc. 2007-2 , or the most current revenue procedure in effect. Be aware that the revenue procedure is a published document that is annually revised. The IE should follow the current procedures for requesting technical advice from the National Office, in coordination with Area Counsel. After obtaining the technical advice, the IE will prepare Form 3963 based on the technical advice, making an appropriate adjustment. See IRM 4.60.9
  4. Discussions with a taxpayer or taxpayer’s representative relative to the examination or potential adjustment in the boycott area will be the joint responsibility of the domestic examiner and the IE. However, the IE is responsible for the final development of the international boycott aspects of the case.

  5. In cases where the IE confirms that a Form 5713 should have been filed and:

    If Then
    There is an indication that the failure to file was willful. The domestic examiner will suspend audit activity at the earliest opportunity without disclosing to the taxpayer, the taxpayer’s representative, or the taxpayer’s employees the reasons for such suspension. The domestic examiner, with the assistance of the IE, will refer the matter to the Criminal Investigation Division.
    There is an indication that a filed Form 5713 contains false or fraudulent statements. Same as above
    The IE discovers any other firm indication of fraud. Same as above

4.60.8.3.8  (06-05-2014)
International Business Compliance (IBC) and Transfer Pricing Practice (TPP) Rules of Engagement for Transfer Pricing Issues

  1. The memorandum of understanding (MOU) dated September 30, 2013 between IBC and TPP sets forth guidelines for rules of engagement when examiners plan and examine transfer pricing issues.

  2. Please refer to IRM 4.61.3Examination of Transfer Pricing Cases.

4.60.8.4  (06-05-2014)
IRM 4.60.8 Exhibits

  1. This IRM contains an extensive number of exhibits, including pattern letters to taxpayers. These exhibits are for illustration purposes only and should not be relied upon as a basis for establishing the IRS position on any examination issue.

  2. The IE must be particularly careful to research the applicable tax laws, revenue procedures and IRM guidelines prior to sending out any written communication to the taxpayers or their representatives. The pattern letters included in the exhibits below are simply for illustration purposes.

Exhibit 4.60.8-1 
Index to IRC 6038A Exhibits

MONETARY PENALTIES:
Exhibit 8–2 Failure to File Form 5472
Exhibit 8–3 Failure to Maintain Records
Exhibit 8–4 Failure to Produce Foreign Maintained Records
AUTHORIZATION OF AGENT:
General Situations:
Exhibit 8–5 Agency Designation Letter
Exhibit 8–6 Authorization of Agent
Exhibit 8–7 Nonacceptance of Limited Authorization
Specific Situations:
Exhibit 8–8 Foreign Parent on Behalf of Itself and/or Other Foreign Related Parties
Exhibit 8–9 AoA - Foreign Parent on Behalf of Itself and/or Other Foreign Related Parties
Exhibit 8–10 Attachment to Authorization of Agent
Exhibit 8–11 U.S. Reporting Corp. on Behalf Itself and Any or All Consolidated Subsidiaries
Exhibit 8–12 AoA - U.S. Reporting Corp. on Behalf of Itself and Any Consolidated Subsidiaries
Exhibit 8–13 Attachment to Authorization of Agent
Exhibit 8–14 Combination Attachment
NONCOMPLIANCE PENALTY:
Exhibit 8–15 Formal Notice of Failure to Authorize as Agent
Exhibit 8–16 Formal Notice of Failure to Produce Records Via Summons

Exhibit 4.60.8-2 
Failure to File Form 5472

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Exhibit 4.60.8-3 
Failure to Maintain Records

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Exhibit 4.60.8-4 
Failure to Produce Foreign Maintained Records

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Exhibit 4.60.8-5 
Agency Designation Letter

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Exhibit 4.60.8-6 
Authorization of Agent

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Exhibit 4.60.8-7 
Nonacceptance of Limited Authorization

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Exhibit 4.60.8-8 
Foreign Parent on Behalf of Itself and/or Other Foreign Related Parties

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Exhibit 4.60.8-9 
AoA - Foreign Parent on Behalf of Itself and/or Other Foreign Related Parties

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Exhibit 4.60.8-10 
Attachment to Authorization of Agent

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Exhibit 4.60.8-11 
U.S. Reporting Corp. on Behalf of Itself and Any or All Consolidated Subsidiaries

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Exhibit 4.60.8-12 
AoA - U.S. Reporting Corp. on Behalf of Itself and Any Consolidated Subsidiaries

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Exhibit 4.60.8-13 
Attachment to Authorization of Agent

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Exhibit 4.60.8-14 
Combination Attachment

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Exhibit 4.60.8-15 
Formal Notice of Failure to Authorize as Agent

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Exhibit 4.60.8-16 
Formal Notice of Failure to Produce Records Via Summons

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