IRS practice unit examines three requirements to apply section 482

IRS practice unit, requirements to apply section 482

The IRS Large Business and International (LB&I) division today publicly released a practice unit—“Three requirements of IRC section 482”—that is part of a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions.

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Text of the practice unit (release date of 6 April 2016) is available on the IRS practice unit webpage.

This practice unit explains that section 482 allows the IRS to make allocations so that taxpayers clearly reflect income attributable to controlled transactions and to prevent the evasion of taxes. There are three basic prerequisites before section 482 can be applied:  

  • There must be two or more organizations, trades or businesses.
  • There must be common ownership or control, either directly or indirectly of such entities.
  • The IRS must determine that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of those entities. 

All three prerequisites must be present for the examiner to apply the rules under section 482.

KPMG observation

The IRS practice units identify areas of strategic importance to the IRS, provide insight as to how IRS examiners will approach various transactions, and generally provide an understanding of the context in which an IRS examiner will approach a particular issue or transaction. 

Thus, taxpayers (and their tax advisers) facing an IRS examination or concerned with issue(s) presented by these practice units will want to review the relevant practice units, so as to have a better understanding of the issues that may arise either prior to or during an examination. For instance, the IRS practice units typically provide information that can help taxpayers:

  • Plan for appropriate documentation during return preparation
  • Effectively approach certain elections or certain transactions 
  • Respond appropriately to IRS correspondenceFor taxpayers selected for a pending IRS examination, the practice units can provide information that may assist with preparation for the examination.

For taxpayers actually under examination, the practice units may provide information that can assist taxpayers respond to IRS requests.

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