Taxpayer’s affirmative use of section 482 | KPMG | GLOBAL

IRS practice unit, taxpayer’s affirmative use of section 482

Taxpayer’s affirmative use of section 482

The IRS Large Business and International (LB&I) division today publicly released a practice unit—“Taxpayer’s affirmative use 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 12 May 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. In general, section 482 can only be used by the IRS, but taxpayers are allowed to invoke section 482 under certain situations: 

  • On a timely filed U.S. income tax return, the taxpayer is reporting the results of a transaction that are different than the actual prices charged, but is doing so to clearly reflect an arm’s length result. 
  • In appropriate circumstances, the IRS may permit amended returns that increase taxable income if the results are otherwise arm’s length. 
  • A taxpayer can request a setoff when the IRS proposes a section 482 allocation. The setoff transactions must be between the taxpayer and the same controlled party involved in the proposed section 482 adjustment, be in the same tax year, and follow certain procedural requirements. 

The practice unit explains that taxpayers are not allowed to file an untimely or amended return that decreases U.S. taxable income based on allocations with respect to controlled transactions. 

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 correspondence

For 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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