The Internal Revenue Service is falling short on inspecting the international tax transactions of small businesses for compliance problems, according to a new report.

Large companies are much more likely to be examined for their international tax transactions, said a report from the Treasury Inspector General for Tax Administration. The Large and Mid-Sized Business Division of the IRS has procedures in place to automatically route many corporate tax returns to examination specialists via the IRS intranet if the returns include international transactions.

At the Small Business/Self-Employed Division, however, the process relies to a great extent on managers who need to request the assistance of specialists to look at issues such as transfer pricing and foreign tax credits. As a result, the assistance of a specialist was not requested for 91 percent of the tax returns handled by the SB/SE Division during the period covered in the report.

The tax ramifications can be serious. TIGTA noted the record-breaking $3.4 billion settlement of a transfer-pricing dispute in 2006 with drug maker GlaxoSmithKline over inter-company transactions with some of GSK's foreign affiliates.

A high-ranking SB/SE Division official advised TIGTA that plans are underway to improve the way in which corporate tax returns with international transactions are identified and selected for examination. "Until these changes have taken place, the IRS risks missing a significant number of high-risk international tax issues that should be examined," said the report.

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