This is a lightly AI-edited transcript of the CPE webinar “Tariffs and Transfer Pricing: How to Stay Compliant and Avoid IRS Scrutiny,” presented by Eric Tuthill, CPA, and Cheri Valerio, CPA of Corporate Tax Advisors.
While based on the original audio, the transcript has been cleaned up and enhanced for clarity and readability to help professionals better understand the key concepts discussed. Filler words, tangents, and redundancies have been minimized, while the core educational value of the presentation has been preserved.
This version is designed to serve as both a written resource and a companion to the full video recording, making it easier to revisit technical ideas or share insights with your team.
Gabe (Moderator):
Hello everyone, and welcome to another webinar from CPA Academy. Thanks for joining us today.
My name is Gabe, and I’ll be your moderator for today’s session: “Tariffs and Transfer Pricing: How to Stay Compliant and Avoid IRS Scrutiny.” Our presenters today are Eric Tuthill, CPA, and Cheri Valerio, CPA, both with Corporate Tax Advisors.
Before we get started, let’s take care of a few housekeeping items.
First, if you haven’t already, please go to the Q&A tab on your control panel and let us know that you can hear my voice and see the title slide. While you’re there, feel free to share something you’d like to take away from today’s session.
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Looks like responses are already coming in from across the country—thanks, everyone!
Let’s talk about CPE:
- This session qualifies for 1 CPE or CE credit.
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Finally, you can download today’s presentation slides from the Handouts tab on the control panel.
With that, let’s welcome our presenters. Eric and Cheri, the floor is yours.
Eric Tuthill, CPA:
Thanks, Gabe. Hello everyone—my name is Eric Tuthill, and I’m a CPA with Corporate Tax Advisors. I’m joined today by Cheri Valerio, also a CPA with our firm.
Before coming to CTA, I spent time with mid-tier firms like BDO and BKD, working on international and federal tax projects. Later, I ran my own firm for several years, supporting a variety of clients before returning to the consulting space full-time.
I approach international tax issues like transfer pricing from a practitioner’s point of view—especially solo CPAs or smaller firms trying to make sense of these complex rules. Cheri brings the perspective of working with more complex entity structures and higher-volume cases.
Today, we’re going to take you through the fundamentals of transfer pricing—what it is, who’s affected, and how it intersects with tariff policy and IRS enforcement trends. We’ll start at a high level, but the discussion will build into more nuanced examples to help you understand how to advise clients in a shifting global tax environment.
We know there’s a mix of people here today—some just looking for CPE, some newer to international tax, and others who may be managing larger clients with cross-border transactions. We’ll make sure there’s something in here for all of you.
Let’s get started.
Eric Tuthill, CPA:
Before we dive in, I want to frame this the way I try to approach any complex topic: I put myself in your shoes. If I were attending this session trying to learn something new, what questions would I want answered right away?
For most of us, that starts with the basics:
- What is transfer pricing?
- Who is subject to transfer pricing rules?
- And why is this so important now?
Transfer pricing tends to be one of those overlooked areas of international tax. There’s no specific IRS form you file to document it—but if your clients engage in cross-border transactions, they’re required to have a transfer pricing policy in place. It’s not optional. If there are international transactions between related parties, documentation is required.
And it’s not just about compliance for compliance’s sake. The IRS uses this documentation to determine whether income is being properly allocated between countries. So if your client is part of a multinational structure—even a small one—they need this.
We’re going to talk about who’s affected, how new tariffs are playing into this, and what the IRS is really scrutinizing in these transactions. You’ll see as we go that the IRS is taking a much closer look at transfer pricing than it has in the past. That’s due to a number of factors—policy changes, budget shifts, and a broader concern about how multinationals move profits around.
If you have an economics background or experience with international tax, you’ve probably already seen some of the red flags. There are real incentives for companies to structure transactions to minimize global tax exposure—but those structures can backfire if they’re not properly documented or if they appear abusive.
We’ll also spend time on the “so what” of all this. How do you protect your clients? How do you ensure their transfer pricing is defensible, especially with the current policy environment changing so rapidly?
Just two days ago, the Senate Finance Committee released a new round of updates. Things are moving fast. We need to help our clients get ahead of it so they’re not reacting to IRS notices—they’re ready.
Gabe (Moderator):
Thanks, Eric. We’re about to launch our first polling question. This will be open for about a minute, and you’ll need to answer at least three out of four polls today to get your CPE credit.
If you have any technical questions, feel free to message me in the Q&A box. I’m here to help.
Eric Tuthill, CPA:
Alright, while that poll is running, let’s jump into the first major concept: what is transfer pricing?
At a high level, transfer pricing is simply the pricing of goods, services, or intangibles transferred between related companies in different tax jurisdictions. When two companies under common control operate in different countries, the prices they charge each other matter—for tax purposes.
For example, say you’ve got a parent company, Company Z, that owns two subsidiaries: Company A and Company B. Company A operates in a jurisdiction with a 20% tax rate, and Company B operates in a country with a 30% rate. Company B manufactures a part of a product, and Company A finishes it.
The parent company—Company Z—gets to decide what price Company B charges Company A for that component. Depending on how they set that price, they can affect where the profit ends up.
That’s where the tax planning comes in. If they shift more profit to the lower-tax country, they reduce the overall global tax burden. That’s perfectly legal—as long as the pricing reflects an “arm’s-length” transaction, meaning it’s what unrelated parties would charge under the same circumstances.
Now, domestically here in the U.S., we don’t worry much about this because of consolidated returns and state apportionment rules. But when you cross borders, transfer pricing becomes one of the most critical tools countries use to protect their tax base.
This is why governments care. If the pricing isn’t fair or defensible, they lose tax revenue. And if a taxpayer can’t justify their pricing with proper documentation, that opens the door to IRS adjustments, penalties, or even double taxation.
So in this next section, we’ll use this basic Company A / Company B example to show how transfer pricing works in practice and why the IRS is watching it so closely—especially with tariffs and trade policy in play.
Eric Tuthill, CPA:
As Cheri is about to show, this gets a lot more complex in practice—but that overview gives you a 10,000-foot understanding of how intercompany pricing can impact the total tax a company pays globally.
The basic idea is this: by adjusting the transfer price between related companies in different tax jurisdictions, multinationals can shift where profits are recognized. If you price goods lower in the high-tax country and higher in the low-tax country, you reduce your global tax bill.
Let’s say Company B charges $3 per unit to Company A. With that pricing, the tax paid might come out to $1.30 per unit in our example. But if we increased that transfer price to something closer to market value—say $5 per unit—the tax burden shifts.
That increase affects where profits land. A higher transfer price means more profit (and tax) for the lower-tax country. But if that price is too aggressive—too far from what a third party would pay—the IRS may step in and question it.
This is where the concept of arm’s length pricing comes in. If Company A could buy that same component from an unrelated company on the open market for $5, but is paying only $3 to a related party, the IRS may see that as profit shifting.
By pricing that internal transaction at $5 instead of $3, the overall tax paid increases—say from $1.30 to $1.50 per unit—but it’s allocated in a way that reflects economic reality. That’s what the IRS expects.
So the amount you charge in an intercompany transaction directly impacts tax revenue in each jurisdiction, and it can materially affect consolidated net profit. That’s why transfer pricing matters.
With that foundation in place, I’m going to hand things over to Cheri so she can walk you through a real-world example—one that factors in tariffs and actual pricing scenarios that clients are dealing with today.
Cheri Valerio, CPA:
Thanks, Eric. Let’s walk through a common scenario we see all the time.
We have a U.S. company producing a finished product. A key component is purchased from its related manufacturing subsidiary in Mexico. Both entities—U.S. and Mexican—are owned by a consolidated global parent.
In this case:
- Mexico’s tax rate is 30%
- U.S. tax rate is 21%, and we’ll assume no state tax (like in Texas or Florida)
Now, in Scenario 1, the intercompany transfer price for the component is set at $110. In Scenario 2, we use a tested transfer price of $55.56, which yields a 10% operating margin for the Mexican company. That’s consistent with comparable Mexican manufacturers and satisfies both U.S. and Mexican tax authorities.
Let’s look at Scenario 1 in more detail.
The parent company wants to shift profits to Mexico, perhaps to reinvest there. Even though Mexico has a higher tax rate, there may be business reasons for retaining income there.
So if the Mexican company sells the part for $110 and their cost of goods sold is $50, that’s a $60 profit per unit, or a 55% margin—very high.
From the U.S. side, if they sell the final product for $200 but paid $110 for the component, and incur some additional finishing costs, the U.S. profit per unit ends up around $10, or 5%. The U.S. is only recognizing $2.10 in tax per unit.
That kind of margin split may raise red flags with the IRS. They may call for a transfer pricing study to test whether $110 is defensible as an intercompany price.
Now let’s consider what would happen if these weren’t related parties.
If the U.S. company had to buy that component on the open market, they’d likely pay around $55 to $60 based on what unrelated manufacturers in Mexico typically earn—a 10% margin. This is a common benchmark used in transfer pricing called the Comparable Profits Method.
Using that 10% margin, our tested transfer price comes out to $55.56 per unit, not $110.
Cheri Valerio, CPA (continued):
So what happens when we apply that $55.56 price?
- The Mexican company still has the same production cost of $50
- With the $55.56 sale price, they earn a 10% profit, which is in line with market comparables
- Mexico still collects tax, but not on an inflated profit
Now look at the U.S. side:
- The U.S. sells the finished product for $200
- With a $55.56 component cost and additional production expenses, the U.S. company now has a much higher profit margin
- That results in the IRS collecting significantly more tax—$13.53 per unit, compared to just $2.10 in the first scenario
This revised pricing satisfies both countries:
- Mexico gets a fair profit based on market data
- The U.S. sees income that aligns with value creation and economic substance
From a consolidated perspective, the total tax paid by the global group may be about the same—but where that tax is paid shifts significantly. That’s why both governments scrutinize transfer pricing.
When pricing strategies between related parties aren’t arm’s length, that’s considered profit shifting or base erosion—especially when deductions or income allocations reduce tax in high-rate jurisdictions.
Eric Tuthill, CPA:
Exactly. And that brings us back to the bigger picture: why the IRS is paying so much attention to what your clients are charging between related entities.
As you can see from this example, the choice of transfer price can drastically affect how much tax is collected in each country. That’s why documentation and defensible pricing are absolutely essential.
Eric Tuthill, CPA:
So, just to reinforce that last point—under Scenario 2, the U.S. government collects $13.53 in tax per unit, compared to only $2.10 under Scenario 1. That’s a massive difference. It makes total sense why the IRS is deeply concerned about how companies are pricing intercompany transactions.
We’ll get more into this as we move through the rest of the presentation, especially when we look at how IRS priorities are shifting. But the takeaway is: transfer pricing has real implications for tax revenue allocation—and the IRS is watching.
Now, before we continue, I want to quickly respond to a great question from Curtis in the Q&A. He asked about pricing databases—specifically how transfer pricing studies work in terms of sourcing comparable data.
Here’s the deal: most transfer pricing studies aren’t based on individual product prices. They’re built around profit-level indicators like net margins or operating margins. So, we’re not usually matching “this widget sells for $X.” Instead, we’re looking at what kind of profit a comparable company earns and using that to justify the pricing.
That’s because both governments involved—like the U.S. and Mexico in our earlier example—are primarily interested in what’s economically fair. The transfer price has to reflect how an unrelated party would operate under similar circumstances. That’s the entire basis of the arm’s length standard.
Which brings us to a critical point: the OECD, or Organisation for Economic Co-operation and Development. And yes, that’s spelled with an “s”—it’s the British spelling.
The OECD is the international body that sets transfer pricing principles for most developed countries, including the U.S. It provides a framework for what’s considered a fair, arm’s length allocation of profit among related parties in different jurisdictions.
The idea is to prevent profit shifting—where companies move income into lower-tax countries—and base erosion, where deductions or transfer pricing structures reduce a country’s taxable base.
If profits are shifted out of the U.S., that’s a loss of revenue for the Treasury. The IRS’s job is to protect against that—and transfer pricing studies are how you demonstrate that your client’s pricing is reasonable and compliant.
So what does the OECD want?
They want intercompany transactions to be priced as if they were between unrelated parties. What would it cost if you had to go to a third-party vendor on the open market? That’s the essence of the arm’s length principle.
Now, if you look at OECD member countries, you’ll notice a few big players missing—notably China and Russia. They’re not bound by OECD principles, and that creates additional friction. That’s part of why the U.S. has turned to tools like tariffs—to counter perceived imbalances and protect domestic tax revenue.
Eric Tuthill, CPA (continued):
In my opinion, this is one of the most important points of the presentation—especially for smaller firms and solo practitioners who may have overlooked transfer pricing in the past.
I’ve talked to many business owners and CFOs who either weren’t aware that a transfer pricing study was required, or they underestimated the risk of skipping it. Sometimes it was a cost decision—“we’re new in the U.S., trying to stay lean”—and as a practitioner, I may have let it slide.
But that’s not acceptable anymore. The risks are too high, and the IRS is signaling that this is now a priority enforcement area.
As tax advisors, we need to be much more direct about the consequences of noncompliance. It’s not just about avoiding audit—it’s about avoiding serious penalties and scrutiny as the IRS pivots toward more aggressive international enforcement.
And I believe that’s where the IRS is headed. You’ll start to see budget and personnel shifts—maybe even away from auditing domestic taxpayers and toward what I’d jokingly call an “External Revenue Service.” They’re going to follow the money, and the money is often in multinational transactions.
Who needs to comply?
Anyone engaged in cross-border transactions with related parties. That includes:
- U.S. entities paying royalties to foreign affiliates
- Distributors buying goods from overseas related manufacturers
- Shared service arrangements across jurisdictions
If you’re doing business across borders and your entities are related, transfer pricing applies.
Most of you are familiar with the tax forms already:
- Form 5471, 5472, 8865, 926, 1042, etc.
- These forms come with automatic $10,000 penalties for failure to file
So if you’re already filing these forms, chances are transfer pricing documentation is also required—even if it’s not filed directly with the IRS. The documentation must be ready and on hand in case of audit.
Eric Tuthill, CPA:
If your client is filing any of those international forms—5471, 5472, 8865, 926, 1042—you need to assume they also need a transfer pricing study in their file. I’ll show you why not having one can be a big problem in just a few slides.
But the point is: these are the clients you need to prioritize. Go through your client list now and flag those with cross-border operations. These are the folks you should be having this conversation with—urgently, especially since we’re halfway through the tax year, and tariffs are likely to stick.
Related Party Definitions & Applicable Entities
Let’s zoom out for a second and look at how the U.S. defines related parties.
This is governed by Section 482, which also includes the key transfer pricing rules we’re talking about today.
The common situations we see are:
- U.S. corporations with foreign subsidiaries
- Foreign corporations with U.S. subsidiaries
- Brother-sister entities under common control (like our earlier example with GlobalCo and its branches)
And remember—it’s not just corporations. These rules apply to:
- Partnerships
- LLCs
- Trusts
- Branches
- Permanent establishments
Basically, any related entity with a cross-border relationship needs to comply with transfer pricing rules.
And don’t overlook the individual ownership piece. When you’re preparing Form 5471 or 5472, you also have to disclose individual shareholders. The IRS wants to know who controls the entities, and those relationships matter.
What Transactions Trigger Transfer Pricing Rules?
Let’s break down the types of transactions that the IRS is watching:
- Sale or purchase of tangible goods
This is the most obvious. Think manufacturing and assembly—buying parts in Mexico, finishing them in the U.S. That’s transfer pricing 101. - Provision of services
Often overlooked. If a U.S. company is charging a related foreign entity for management or administrative services—or vice versa—those charges have to be arm’s length.
This is also where base erosion comes in. If you’re shifting deductions out of the U.S. by paying fees to a related party overseas, that’s base erosion—just as problematic as profit shifting.
- Use of intellectual property (IP)
This one surprises a lot of folks. If a U.S. company uses technical know-how, trademarks, or patents developed by a related foreign entity (or vice versa), you must assign an appropriate royalty or license fee. That needs to be included in your transfer pricing report. - Intercompany financing
Loans, guarantees, or any other kind of financial support between related parties needs to be priced at market rates. Many of you have filed Form 1042 for interest payments to foreign affiliates—this is the same concept. - Cost-sharing agreements, management fees, and other intercompany charges
All of these need documentation showing the pricing is defensible. The IRS wants to see that income and deductions are allocated fairly, and that U.S. profits aren’t being artificially reduced.
Eric Tuthill, CPA (continued):
All of this must be documented in a transfer pricing report. That report is what the IRS will look at if there’s an audit. It’s your client’s best protection against scrutiny and penalty.
And this isn’t theoretical—the IRS is watching this closely because they want to preserve U.S. tax revenue. That includes income taxes and increasingly, tariff revenue as well.
[Polling Question #2 is launched]
Moderator (Gabriel):
Alright, polling question #2 is open for about a minute. I’m available in the Q&A if anyone needs help. Back to you, Eric.
Tariffs and Transfer Pricing
Eric Tuthill, CPA:
Thanks. Now we’re going to shift gears and talk about how incoming tariffs affect transfer pricing. I’m handing it over to Cheri to walk us through that with a deeper look, especially for those of you with international tax experience.
Cheri Valerio, CPA:
Let’s go back to Scenario 1 where the multinational was shifting profit to Mexico.
- U.S. revenue per unit: $200
- Intercompany cost of goods sold from Mexico: $110
- That gives the U.S. a 5% profit margin
- The U.S. government collects $2.10 in tax per unit
Now let’s introduce a 10% tariff. The company has two options:
- Absorb the tariff cost
- Pass the cost on by raising prices
Option 1: Absorb the Cost
The cost of goods sold becomes $121 (that’s $110 + $11 tariff).
- The U.S. now has a loss per unit
- Tax per unit drops to $0
- But the government still collects the $11 tariff
So even if the company wipes out its U.S. profit, the government is still getting revenue via the tariff.
Option 2: Pass Through the Tariff
If the company raises its price by $11 to cover the tariff:
- Revenue per unit becomes $211
- COGS is $121
- Net profit returns to $10
- Tax per unit is $2.10, same as before
- Tariff revenue is still $11
Now the U.S. government is collecting $13.10 total per unit—more than double the original amount.
Realistically, it may fall somewhere in the middle. Companies might not be able to raise prices fully, but tariffs provide a guaranteed revenue stream for the government.
After the Transfer Pricing Study
Once we’ve done a proper transfer pricing study, we realize that the intercompany price should be $55.56, not $110. That’s based on a 10% operating margin for comparable Mexican manufacturers.
- U.S. profit per unit becomes $64.44
- U.S. tax at 21% = $13.53 per unit
That’s a huge jump from $2.10. The IRS is happy. The Mexican tax authority is happy because the manufacturer still gets their 10% profit. It’s compliant and fair.
Now Add Tariffs to the Compliant Scenario
If the company absorbs a 10% tariff:
- COGS increases to $61.12
- Profit drops slightly
- Tax per unit falls to $12.37
- But the U.S. government still gets the $5.56 tariff
Total U.S. revenue: $17.93 per unit
If the company passes the tariff through to consumers:
- Revenue becomes $205.56
- COGS still $61.12
- Profit remains $64.44
- Tax per unit = $13.53
- Plus the $5.56 tariff
Total U.S. revenue: $19.09 per unit
Eric Tuthill, CPA:
And that’s the punchline.
By simply correcting the transfer price to a tested, arm’s length number and layering in a tariff, the U.S. government goes from collecting $2.10 to collecting over $19 per unit—without violating any treaty or tax rule.
This is why they’re going to enforce this hard. This is why your clients need documentation, even if they’re small.
The IRS isn’t just interested in whether a taxpayer is paying something—they want to know if they’re paying the right amount, in the right place.
Eric Tuthill, CPA:
I want to take a minute here to talk about why the government’s focus is shifting so heavily toward international companies—specifically in the realm of transfer pricing.
This hasn’t always been the case. Historically, this wasn’t a huge enforcement priority. But things are changing.
There are a few key reasons why:
IRS Budget and Enforcement Priorities
For years, the IRS’s budget was limited, and when it did get increased—like recently—it was largely tied to provisions in the Inflation Reduction Act (IRA). That additional funding was earmarked for administration of green energy tax credits—things like the Clean Energy and 179D credits. Not necessarily for transfer pricing enforcement.
But now, we’re starting to see a strategic shift.
That IRA funding came with an expectation: offset the cost of those new credits with increased tax collections. That’s why the IRS began ramping up audits over the last couple of years, particularly in the domestic space. A lot of you saw that firsthand.
For example, many noticed that Employee Retention Credit (ERC) payments slowed to a crawl. Part of that was due to fraud concerns—but part of it, in my opinion, was optics. They needed to show value—show that hiring all these new IRS agents was yielding real results.
Tariffs and Transfer Pricing: A Revenue Connection
Now, circling back to our earlier discussion on transfer pricing—how much is charged to a foreign company affects tariff revenue. That’s the key. The transfer price directly determines how much tariff the U.S. collects.
And tariffs have become a core part of this administration’s strategy. They want to see enforcement that proves these policies are “working.”
So while there are agencies responsible for direct tariff collection, the IRS is central to making that happen effectively, because they’re the ones who verify whether intercompany pricing is legitimate.
And how does the IRS do that?
Through transfer pricing audits. You’re going to see more of them. A lot more.
Strategic Goal: Domestic Economic Stimulation
What’s the bigger picture? These policies are all part of a broader domestic economic strategy. The government is trying to incentivize U.S.-based production, and one of the ways to do that is by making foreign sourcing less attractive.
That means:
- More tax pressure on foreign operations
- Greater scrutiny of inbound transactions
- And more incentives for companies to stay domestic
You see this clearly in the latest Senate Finance tax proposal.
That bill includes:
- A new advanced manufacturing investment credit
- 100% bonus depreciation to keep more cash in the hands of U.S. businesses
- A restoration of full expensing for R&D (Section 174), which had been amortized over five years
- A continued distinction between domestic and foreign R&D, with foreign R&D still amortized under Section 174
This is intentional. The goal is to stimulate investment in the U.S., and disincentivize foreign production or R&D.
Budget Cuts and New Incentives
At the same time, Congress is cutting portions of the IRS budget—particularly those tied to the IRA—while proposing new economic boosters like “no tax on overtime.”
Why? To increase GDP per person. To encourage Americans to work more and earn more, tax-free. It’s all part of this economic nationalism push.
More Signs of Foreign Policy Shift
We’re also seeing signs of unfavorable foreign policy in enforcement.
- Tariffs are the most obvious example
- The proposed tax bill also includes increases to the Base Erosion and Anti-Abuse Tax (BEAT) rate—from 10% to 14%
- There are significant changes to GILTI (Global Intangible Low-Taxed Income) and the foreign tax credit regime
- There’s a section titled “Remedies Against Unfair Foreign Taxes”—a clear signal that the U.S. is looking to push back on how foreign jurisdictions tax U.S. businesses
This isn’t just rhetoric. It’s backed by real tax policy shifts.
Eric Tuthill, CPA (continued):
For the practitioners on today’s call: we’ll be putting all of this in an upcoming newsletter—summarizing the key foreign tax changes and what they mean for your clients.
But the bottom line is this: the government isn’t looking to extract more from small U.S. businesses. They’re shifting focus away from domestic audits and toward foreign enforcement and multinational transactions.
That means more scrutiny on cross-border structures, more transfer pricing audits, and increased penalties for noncompliance.
We’re seeing a strategic shift in how the IRS allocates resources. And based on recent hiring and enforcement priorities, I believe that shift is only going to grow.
Eric Tuthill, CPA:
So let’s think about this not just domestically, but globally. The U.S. is trying to send a message to the rest of the world, right?
When we talk about tariffs, budget shortfalls, and increased enforcement, it’s not just about collecting more from our own citizens. There’s also this idea of making up the gap through external taxation—meaning revenue from foreign entities doing business here.
It’s almost like we’re seeing the rise of an External Revenue Service, if you want to call it that.
Why Transfer Pricing Is Now Critical
We already drew parallels to the IRA and how that influenced enforcement strategy. But the economic pressures go beyond that.
From a macro perspective, there’s mounting pressure to generate revenue—and transfer pricing enforcement is a clear way to do that. You’re going to see the IRS doubling down.
But let me be clear: they’re not going after your small business clients. They’re not targeting Main Street or core domestic companies. The IRS is looking at tariff-linked transactions and cross-border intercompany pricing as a rich source of tax and tariff revenue.
That’s why transfer pricing is becoming such a high-priority issue.
What Happens If You Don’t Comply?
Now the question becomes: what if your client doesn’t do this right?
What if they skip the transfer pricing study or don’t take this seriously?
This is where things get real. Transfer pricing is one of the few areas of the tax code where the IRS has wide latitude to act unilaterally.
If you don’t have contemporaneous documentation—meaning a transfer pricing report in place before the tax return is filed—the IRS can essentially say:
“We think this should have been the price instead.”
And they’ll recharacterize the entire transaction.
IRS Power: Notice of Proposed Adjustment (NOPA)
You’ll get a Notice of Proposed Adjustment (NOPA), and unless you have documentation in hand, you’re on very shaky ground.
Here’s what they can do:
- Increase taxable income by recharacterizing intercompany transactions
- Disallow deductions—particularly those outbound management fees and service charges
- Reallocate profits back to the U.S.
- Apply substantial penalties
And I mean substantial—we’re talking 20% to 40% accuracy-related penalties, depending on the circumstances.
How Transfer Pricing Reports Protect You
But here’s the good news:
If your client has a transfer pricing study in place, that protects them from most of these penalties.
Under IRC §6662(e), contemporaneous documentation serves as a penalty shield, as long as it:
- Was prepared before the tax return is filed
- Is principled and thorough
- Complies with the regulations and IRS guidelines
You basically get a “get out of penalty” card if you can show you acted in good faith and based your prices on real, defendable analysis.
Timing Matters
This is important:
The transfer pricing report must be in place by the due date of the tax return.
If it’s not—and you file the return without it—you may lose penalty protection, even if you complete the study later.
What Does the IRS Expect in a Report?
Let’s look at what the IRS wants to see in your documentation. There’s an IRS FAQ on this that summarizes it well.
They’re looking for:
- Documentation of related-party transactions
- Use of the arm’s length standard
- A recognized transfer pricing method, like the Comparable Profits Method, Transactional Net Margin Method, etc.
- A functional analysis outlining functions, assets, and risks of each party
- An economic analysis showing how the chosen price compares to comparable companies
- Contemporaneous documentation—i.e., it’s all done before the tax return is filed
This is what they consider a “robust” report.
What Should the Report Include?
Here’s a breakdown of what’s typically in a good transfer pricing report:
- Business overview and industry context
- Description of controlled transactions
- A full functional analysis
- Selection and explanation of the transfer pricing method
- Economic comparables (benchmarking analysis)
- Conclusion and support for the pricing decision
- Reconciliation with any filed Forms 5471, 5472, or other international disclosures
Where to Look for More Guidance
The IRS has a detailed document called the Transfer Pricing Examination Process—Publication 5300.
This isn’t a traditional Audit Techniques Guide (ATG) because it’s designed for Large Business and International (LB&I) cases, but it provides a deep look at what the IRS is trained to look for.
It’s dense, yes—but if you’re representing a multinational client, it’s well worth a read.
Practical Benefits: Audit Risk Reduction
One final note—robust documentation may even reduce audit risk.
The IRS FAQ says that strong transfer pricing documentation may lead to early deselection from audit.
That’s a huge incentive.
You’re telling the IRS:
“We’ve done our homework. You won’t find anything egregious here.”
And they may decide to spend their time elsewhere.
Gabriel (Moderator):
Alright, Polling Question #3 has now launched. Please take a moment to respond. We’ll leave it open for about a minute.
Eric Tuthill, CPA:
So let’s talk about who is actually doing these transfer pricing reports, and what goes into preparing them the right way. If you’re an advisor, you need to understand the mechanics of how these reports are built—especially the judgment calls that go into things like sensitivity analyses and comparable selection.
You want to ask:
- Are there other comparables that could apply here?
- Am I opening myself up to future IRS adjustments?
- Are my profit-level indicators consistent?
That last point is huge. You can’t just pick one margin method one year and switch to another the next year to get a better result. The IRS will see that as manipulative—like you’re trying to shift profits or engage in base erosion. That’s a red flag.
Consistency in Profit-Level Indicators
Whatever approach you use—Net Margin, Gross Margin, Return on Assets—you need to stick with it. Be consistent over time unless you have a well-documented reason to change. That’s key to maintaining credibility with the IRS.
You also need to think about how profits are being shared across related parties, particularly in IP-heavy or services-based structures. You want to preemptively answer the questions the IRS is going to ask.
Follow the arm’s length standard as precisely as you can. And if you can’t find perfect comparables, then look at industry-standard ranges, or at least try to construct something that’s defensible from that standpoint.
There will be judgment calls. That’s okay. But the important part is that you document the logic behind them.
Databases and Documentation
Most of the time, these reports are built using publicly available data—especially from large, publicly traded companies. But there are private databases available too, depending on your firm’s resources.
No matter what you use, the goal is to justify why you used a particular method, and also why you rejected other methods. Document the search process:
- What databases did you use?
- What companies were considered?
- Why were certain ones excluded?
This isn’t just a compliance issue—it’s a narrative. A good transfer pricing report is a detailed, technical story about how you arrived at a defensible pricing structure.
You also need to show:
- How comparability adjustments were made
- What assumptions were used
- And that the data is examiner-friendly
Meaning: the IRS agent reading this should be able to understand it easily. Clear industry overviews. Clear company function summaries. No jargon soup. Keep it professional, but accessible.
Make It Examiner-Friendly
That includes:
- Explaining your comparable company selection
- Justifying any adjustments made to align the data
- Making sure your comparables are effective
If you’re looking at companies that do something wildly different from your client’s business, the IRS will call that out. The closer the match, the better. You want to show that your client’s transaction falls within a reasonable range based on market standards.
In short: give the IRS everything they need to see that you’ve reasoned through this properly. That’s the best way to avoid negative adjustments later.
Eric Tuthill, CPA (continued):
Alright, with that said, I’m going to hand it over to Gabriel for Polling Question #4.
Gabriel (Moderator):
Alrighty, Polling Question #4 has just been launched and will be open for the next minute or so. If you have questions, I’m in the Q&A box and happy to help.
Eric Tuthill, CPA:
Thanks, Gabriel.
So here’s the bigger picture. Why are we having this discussion today?
Because at some point, we all have to sit down in front of our clients—our taxpayers—and say:
“Hey, we need to make sure the bad things that could happen… don’t happen to you.”
That’s what we’re here to do. We’re advisors.
And the best way we can advise them is to help them stay compliant, understand the risks, and protect their business from unnecessary scrutiny or penalties.
What Solo and Mid-Sized Firms Should Be Doing Now
If you’re a solo practitioner or with a mid-sized firm, you should go back and look through your returns—especially for any C corporations.
Check for any clients where you filed:
- Form 5471 (U.S. persons with foreign corps)
- Form 5472 (foreign-owned U.S. corps)
- Form 8865 (foreign partnerships)
These are the big ones. And let’s be honest: those should stand out, because each of them carries a $10,000 penalty per missing or incorrect form. So if you’ve handled those filings, hopefully you did them carefully.
But if not?
Now’s the time to reexamine them—because they’re likely going to be under more scrutiny in the next few years than they have been before.
Talk to Your Clients About Foreign Tax and Tariff Planning
Sit down and have open conversations with your clients—especially those with cross-border operations.
Talk about:
- Tariff exposure
- Foreign tax credit changes
- Updates from the Senate tax bill
That bill has a lot of international components, including:
- Controlled Foreign Corporation (CFC) changes
- Provisions for who gets the credit and where
- A new “Remedy Against Unfair Foreign Taxes” section
That’s going to affect how transfer pricing is structured. It’s not just a technical issue—it’s a business decision.
What If Your Client Doesn’t Have Transfer Pricing?
If your client doesn’t currently have a study in place, they need to understand:
- These rules have been around for a long time
- There’s no minimum threshold—small companies are subject too
- They need contemporaneous documentation now
Some of you asked in the Q&A whether anything has changed. The answer is: No, the rules haven’t changed—just the enforcement.
You may not have been advised correctly before, but now is the time to fix it. The IRS is pivoting to this space, and you don’t want your client to be caught off guard.
Expect a Broader Audit Net
For years, a lot of businesses got a pass because they weren’t “big enough” to attract attention. That’s changing.
The IRS is going to cast a wider net. They’re hiring and reallocating resources to focus more on foreign issues, and they’re going to pull in everyone they feasibly can.
That means:
- More audits
- More letters
- More penalty exposure
- And more demand for proper documentation
And it’s on us—as advisors—to stay ahead of that curve.
Eric:
So, as we start wrapping this up, I just wanna circle back to a really important point—this is the time to be talking to your international clients. They need to understand the direction of U.S. economic policy and how increasing government scrutiny is going to impact them.
There are a lot of reasons to be concerned right now if you’re advising international taxpayers. These clients may find themselves under far more pressure than in previous years. And the solution for some of them might be as big as relocating operations back to the U.S.
This is the perfect time to be offering strategy—and yes, that includes generating consulting fees. There’s plenty to talk about and clients are actively looking for help navigating these changes.
Eric:
And if you’re not comfortable tackling that alone, that’s where we come in. It’s always a smart move to bring in the right professionals to help with documentation and compliance. We see ourselves as one of those resources, and we’re here to partner with you and your clients.
Let me give a quick overview of how we handle transfer pricing engagements:
We start with a preliminary review call—a free, no-commitment conversation to understand the taxpayer’s international structure. We can do it with the CPA on the call, or directly with the taxpayer—whatever works best for you.
Then, we move into our standard process:
- We issue information requests,
- Collect supporting documentation,
- And go through a full transfer pricing study to ensure the intercompany arrangements meet arm’s-length standards.
If something’s off—even retroactively—we discuss corrective steps. Once finalized, we deliver a comprehensive study report that you can confidently stand behind in an audit.
And yes, we stand by our work. We handle audit defense if needed—whether that’s us, our tax attorneys, or our senior team. We’re committed to protecting your clients and making it as painless as possible.
Q&A Session
Moderator:
We’ve got a few minutes left. Let’s try to squeeze in a couple questions. Here’s one:
“In the Mexico example, why would a company intentionally shift profits to Mexico when it results in higher global tax?”
Eric:
Great question. In that example, the goal wasn’t pure tax savings. The company actually wanted to push profits to Mexico because they were reinvesting in the region—building out manufacturing infrastructure. They saw it as a way to reinvest without issuing a formal capital contribution or loan.
So while the global tax bill was higher, it aligned with their internal investment strategy. And yes, it works both ways—sometimes companies undercut U.S. profit, and sometimes they shift value offshore for reinvestment.
Question:
“Does transfer pricing apply to CPA firms using offshore labor?”
Eric:
It depends. If you’re hiring offshore contractors—true third-party labor—that’s just a regular deduction. No transfer pricing issue.
But if you own the offshore entity—like you set up a company in India or the Philippines and run your own staff through it—then yes, transfer pricing rules would absolutely apply. It’s all about ownership and control.
Moderator (Gabriel):
Alright, we’re down to our last minute. Big thanks to Eric and Sherry for being here today!
Just a reminder to everyone: handouts, the webinar archive, and your CPE certificate will be available in your CPA Academy account within 24 hours. PTIN credits will be reported separately.
Keep an eye out for the evaluation link in your inbox—we’d love your feedback. And any unanswered questions will be forwarded to Eric and Sherry for follow-up.
Thanks again, and we hope to see you at a future webinar!
Eric:
Thanks everyone! Appreciate you joining us today.
