Lee A. Sheppard (Contributing Editor, Tax Analysts) has published Draft Senate Finance APA Report Shows Incompetent IRS, also available on the Tax Analysts web site as Doc 2005-13514, 2005 TNT 119-1.  Here is the opening:

"The National Office negotiates as if IRS needs the APA more than the taxpayer does." That is an IRS agent complaining about the generous dealmaking in the IRS Advance Pricing Agreement Program, wherein the IRS cuts transfer pricing deals with large corporate taxpayers. That’s the sort of damaging information that is contained in the recently completed draft of the long-awaited report on the Senate Finance Committee investigation of the APA program. The draft is being reviewed on Capitol Hill pending final release and possibly a Senate hearing.

Separate-company accounting, the arm’s length method, and transfer pricing are all basically unenforceable, and the APA program has been a fig leaf for the legislative and executive branches to avoid admitting that it doesn’t work. That’s all well and good — other OECD countries are doing the same. The problem, as the draft report points out using case studies (drawn from real cases), is that the program is badly managed, and the IRS is giving away the store. No wonder the program is hugely popular with taxpayers and practitioners, as public hearings earlier this year showed.

The IRS is afraid of the report, and IRS officials have been trying to minimize the significance of the Senate investigation ever since it started. Yet the report was widely expected to be a whitewash, since senators on both sides of the aisle like the APA program because business likes it. The Court of Appeals for Aggrieved Business is not about to kill a program that business is happy with. So the draft report attempts to balance the good aspects of the APA program with the rather significant bad aspects.