If the IRS adjusts my related-party pricing, how big are the section 6662 transfer pricing penalties — 20% or 40%?

Section 6662 imposes a 20% accuracy-related penalty for a substantial valuation misstatement, rising to 40% for a gross valuation misstatement. In the transfer-pricing context each tier can be triggered two ways. The transactional test looks at how far your claimed price was from the correct section 482 price. The net-adjustment test looks at the total dollar size of the net section 482 adjustment for the year relative to your gross receipts. You can be exposed under either path, so both are worth understanding.

On the transactional basis, the 20% penalty can apply when the claimed price is 200% or more, or 50% or less, of the correct arm's-length price — i.e., off by a factor of two in either direction. On the net-adjustment basis, it can apply when the net section 482 adjustment for the year exceeds the lesser of $5 million or 10% of gross receipts. For a small LLC the percentage-of-gross-receipts prong is usually the one that bites, because 10% of a small top line is a low dollar bar.

The 40% penalty applies when the transactional misstatement reaches 400% or 25% of the correct price, or when the net section 482 adjustment exceeds the lesser of $20 million or 20% of gross receipts. Crucially, for net section 482 adjustments the statute says you do NOT have reasonable cause unless you met the documentation requirements — so the penalty and the documentation defense are linked. The practical takeaway: the cheapest insurance is a contemporaneous file that makes a large adjustment unlikely and preserves the reasonable-cause defense if one happens. Our /guides/transfer-pricing page maps the thresholds against small-LLC numbers.