The sweeping personnel cuts at the Internal Revenue Service under the current administration will parallel the experience we suffered under the Reagan administration in 1981. We’ve seen this movie before, and with 20/20 hindsight, we all know how the movie ends and what carnage is left in its wake. The damage done to aviation (remember the firing of over 13,000 air traffic controllers back then?) reverberates to this day.
The impact on companies remains to be seen, but one thing to keep in mind is that, eventually, new auditors will be added to the IRS, and when they arrive on the scene, they will be hungry to justify their positions. While it may be tempting to defer certain requirements as they are not filed with the return, it could be a costly mistake.
You should continue to produce your transfer pricing documentation as always for several reasons.
- Regardless of the staffing at the IRS, the counter-party side is unaffected by IRS staffing.
- The agency, through either treaty or mutual exchange agreements, may find and obtain your documentation and request your side for comparison with the counter-party documentation.
- You may reevaluate your entire supply chain structure during this period.
The changes in your value chain alone can upend all your prior documentation, as sourcing of goods may well be diametrically different from your prior documentation. This, in turn, will require further in-depth functional analysis and transaction description. Concurrent with the potential report realignment could be changes in your costs and margins for various aspects of the company.
That sets the stage for what could occur during your next audit cycle. If, through the luck of the draw, you have a relatively inexperienced agent on your audit, the depth and breadth of questions could be formidable. Experience or the lack thereof can create an audit environment with multiple IDRs probing insignificant areas but require an inordinate amount of responses. When added to the stress of trying to backfill years of documentation, the entire experience promotes stress and error.
Ultimately, maintaining consistent documentation practices will serve you well in the short and long term. It will keep you aware of what and how things are evolving, so you can add the appropriate support for your changing environment.
