On October 20, 2023, the Internal Revenue Service (“IRS”) announced the launch of a three-pronged corporate tax compliance initiative as part of the Inflation Reduction Act of 2022[1] with the overarching agenda to reduce the U.S. federal government deficit. As anticipated by Bennett Thrasher (“BT”) in a blog post published earlier this year , a major prong of this initiative is to address non-compliance and aggressive tax positions taken by large corporations by fueling increased transfer pricing scrutiny and enforcement.
As evidence of its new focus on transfer pricing, the IRS disclosed that it plans to send “compliance alerts” to roughly 150 U.S. subsidiaries of foreign corporations that the IRS believes are using questionable transfer pricing tactics to report low profits on domestic activities. The IRS hopes these alerts will remind those taxpayers of their obligations and “incentivize self-correction.” In a recent interview with Tax Notes International (“Tax Notes”)[2], Robert J Kovacev of Miller and Chevalier told Tax Notes “it’s unclear what the compliance alerts will look like, but the IRS is known to send “soft letters” that both request information and serve as a warning that the agency considers the taxpayer to be a compliance risk. If a corporation receives an alert, that suggests that they “may well be on the receiving end of an IRS transfer pricing audit in the near future.” Additionally, [Kovacev] expects such a corporation “would immediately review its transfer pricing position. If the corporation believes its position is justified, and th IRS cannot be persuaded of that fact, then a years-long legal battle becomes very likely.” In another interview, David Kautter of RSM US LLP told TaxNotes “this initiative is especially noteworthy given that it highlights that the IRS thinks there is a problem with transfer pricing enforcement, and this is a low-cost way to alert these taxpayers that the IRS is concerned.”
The IRS’s confirmation of anticipated increased transfer pricing enforcement and scrutiny, coupled with the implementation and materialization of tangible action steps, leads BT to conclude that the question of transfer pricing becoming an issue for your multinational corporation is no longer “if,” but “when.” Now, more than ever, it is imperative to be proactive about your multinational corporation’s transfer pricing position.
- If your transfer pricing study is old and out of date, it is time to consider a refresh to confirm all pricing strategies continue to produce arm’s length results.
- If you are unsure of your risk profile, it is imperative to perform risk assessments to understand and evaluate potential transfer pricing risk from both a U.S. perspective, as well as from a foreign perspective.
- In order to protect your company from penalties and show good faith as a taxpayer, preparing contemporaneous transfer pricing documentation will provide the first and best line of defense in a tax audit.
- Finally, if you or your multinational corporation receive a soft letter, BT’s transfer pricing practice is well positioned to assist taxpayers correspond with the IRS and provide the necessary transfer pricing documentation requirements.
Bennett Thrasher’s transfer pricing practice is well positioned to assist taxpayers in assessing transfer pricing risk and developing strategies to mitigate risk, which may include the preparation of transfer pricing documentation. To learn more about how our professionals can support your transfer pricing needs, please contact Ben Miller or Sarah Norwood by calling 770.396.2200.
[1] https://www.irs.gov/inflation-reduction-act-of-2022
[2] Curry, Jonathan (2023). IRS’s New Corporate Crackdown Won’t Be Resolved Overnight. Tax Notes International, DOC 2023-30311
