Noncompliance Penalties
What are the penalties for violating U.S. Transfer Pricing rules?
Failure to comply with the Section 482 transfer pricing regulations can result in penalties equal to 20% or 40% of the difference between the tax paid and the tax owed depending on whether certain thresholds are met. Internal Revenue Code Section 6662 describes these thresholds and the rules for determining which penalty applies. The rules are further detailed in the following regulations:
Sec. 1.6662-2 Accuracy-related penalty.
(a) In general. Section 6662(a) imposes an accuracy-related penalty
on any portion of an underpayment of tax (as defined in section 6664(a)
and Sec. 1.6664-2) required to be shown on a return if such portion is
attributable to one or more of the following types of misconduct:
(1) Negligence or disregard of rules or regulations (see Sec.
1.6662-3);
(2) Any substantial understatement of income tax (see Sec. 1.6662-
4); or
(3) Any substantial (or gross) valuation misstatement under chapter
1 ("substantial valuation misstatement'' or "gross valuation
misstatement''), provided the applicable dollar limitation set forth in
section 6662(e)(2) is satisfied (see Sec. 1.6662-5).
The accuracy-related penalty applies only in cases in which a return of
tax is filed, except that the penalty does not apply in the case of a
return prepared by the Secretary under the authority of section 6020(b).
The accuracy-related penalty under section 6662 and the penalty under
section 6651 for failure to timely file a return of tax may both be
imposed on the same portion of an underpayment if a return is filed, but
is filed late. The fact that a return is filed late, however, is not
taken into account in determining whether an accuracy-related penalty
should be imposed. No accuracy-related penalty may be imposed on any
portion of an underpayment of tax on which the fraud penalty set forth
in section 6663 is imposed.
(b) Amount of penalty--(1) In general. The amount of the accuracy-
related penalty is 20 percent of the portion of an underpayment of tax
required to be shown on a return that is attributable to any of the
types of misconduct listed in paragraphs (a)(1) through (a)(3) of this
section, except as provided in paragraph (b)(2) of this section.
(2) Increase in penalty for gross valuation misstatement. In the
case of a gross valuation misstatement, as defined in section 6662(h)(2)
and Sec. 1.6662-5(e)(2), the amount of the accuracy-related penalty is
40 percent of the portion of an underpayment of tax required to be shown
on a return that is attributable to the gross valuation misstatement,
provided the applicable dollar limitation set forth in section
6662(e)(2) is satisfied.
(c) No stacking of accuracy-related penalty components. The maximum
accuracy-related penalty imposed on a portion of an underpayment may not
exceed 20 percent of such portion (40 percent of the portion
attributable to a gross valuation misstatement), notwithstanding that
such portion is attributable to more than one of the types of misconduct
described in paragraph (a) of this section. For
example, if a portion of an underpayment of tax required to be shown on
a return is attributable both to negligence and a substantial
understatement of income tax, the maximum accuracy-related penalty is 20
percent of such portion. Similarly, the maximum accuracy-related penalty
imposed on any portion of an underpayment that is attributable both to
negligence and a gross valuation misstatement is 40 percent of such
portion.
(d) Effective dates--(1) Returns due before January 1, 1994. Section
1.6662-3(c) and Sec. Sec. 1.6662-4 (e) and (f) (relating to methods of
making adequate disclosure) (as contained in 26 CFR part 1 revised April
1, 1995) apply to returns the due date of which (determined without
regard to extensions of time for filing) is after December 31, 1991, but
before January 1, 1994. Except as provided in the preceding sentence and
in paragraphs (d)(2), (3), and (4) of this section, Sec. Sec. 1.6662-1
through 1.6662-5 apply to returns the due date of which (determined
without regard to extensions of time for filing) is after December 31,
1989, but before January 1, 1994. To the extent the provisions of these
regulations were not reflected in the statute as amended by the Omnibus
Budget Reconciliation Act of 1989 (OBRA 1989), in Notice 90-20, 1990-1
C.B. 328, or in rules and regulations in effect prior to March 4, 1991
(to the extent not inconsistent with the statute as amended by OBRA
1989), these regulations will not be adversely applied to a taxpayer who
took a position based upon such prior rules on a return filed before
January 1, 1992.
(2) Returns due after December 31, 1993. Except as provided in
paragraphs (d)(3), (4) and (5) of this section and the last sentence of
this paragraph (d)(2), the provisions of Sec. Sec. 1.6662-1 through
1.6662-4 and Sec. 1.6662-7 (as revised to reflect the changes made to
the accuracy-related penalty by the Omnibus Budget Reconciliation Act of
1993) and of Sec. 1.6662-5 apply to returns the due date of which
(determined without regard to extensions of time for filing) is after
December 31, 1993. These changes include raising the disclosure standard
for the penalties for disregarding rules or regulations and for a
substantial understatement of income tax from not frivolous to
reasonable basis, eliminating the disclosure exception for the
negligence penalty, and providing guidance on the meaning of reasonable
basis. The Omnibus Budget Reconciliation Act of 1993 changes relating to
the penalties for negligence or disregard of rules or regulations will
not apply to returns (including qualified amended returns) that are
filed on or before March 14, 1994, but the provisions of Sec. Sec.
1.6662-1 through 1.6662-3 (as contained in 26 CFR part 1 revised April
1, 1995) relating to those penalties will apply to such returns.
(3) Special rules for tax shelter items. Sections 1.6662-4(g)(1) and
1.6662-4(g)(4) apply to returns the due date of which (determined
without regard to extensions of time for filing) is after September 1,
1995. Except as provided in the last sentence of this paragraph (d)(3),
Sec. Sec. 1.6662-4(g)(1) and 1.6662-4(g)(4) (as contained in 26 CFR
part 1 revised April 1, 1995) apply to returns the due date of which
(determined without regard to extensions of time for filing) is on or
before September 1, 1995 and after December 31, 1989. For transactions
occurring after December 8, 1994, Sec. Sec. 1.6662-4(g)(1) and 1.6662-
4(g)(2) (as contained in 26 CFR part 1 revised April 1, 1995) are
applied taking into account the changes made to section 6662(d)(2)(C)
(relating to the substantial understatement penalty for tax shelter
items of corporations) by section 744 of Title VII of the Uruguay Round
Agreements Act, Pub. L. 103-465 (108 Stat. 4809).
(4) Special rules for reasonable basis. Section 1.6662-3(b)(3)
applies to returns filed on or after December 2, 1998.
(5) For returns filed after December 31, 2002. Sections 1.6662-3(a),
1.6662-3(b)(2) and 1.6662-3(c)(1) (relating to adequate disclosure)
apply to returns filed after December 31, 2002, with respect to
transactions entered into on or after January 1, 2003. Except as
provided in paragraph (d)(1) of this section, Sec. Sec. 1.6662-3(a),
1.6662-3(b)(2) and 1.6662-3(c)(1) (as contained in 26 CFR part 1 revised
April 1, 2003) apply to returns filed with respect to transactions entered
into prior to January 1, 2003.
In addition, the IRS has produced a training manual describing its procedures for enforcing these penalties (pdf).
Here are some articles that discuss noncompliance penalties: