The IRS announced (IR-2023-194) on October 20, 2023, that it plans to send compliance alerts to approximately 150 US-based subsidiaries of foreign-owned corporations that distribute goods in the United States. The alerts stem from the companies' alleged use of certain transfer pricing strategies, which the IRS deems improper.

The IRS also said in the news release that it plans to expand the Large Corporate Compliance program in 2024 to audit 60 additional large corporate taxpayers, which will be selected with the help of artificial intelligence.

Background

The Inflation Reduction Act, enacted on August 16, 2022, allocated nearly $80 billion in new funding for the IRS. Of that $80 billion, more than $45 billion was earmarked for enforcement, more than $25 billion for operations support, nearly $5 billion for systems modernization, and over $3 billion for customer service (see Tax Alerts 2023-0710, 2023-1256). However, $1.4 billion of funding was rescinded under the Fiscal Responsibility Act of 2023 and another $20 billion is supposed to be reallocated during 2024 and 2025.¹

The IRS's intensified focus on transfer pricing appears to be a result of the increased IRA funding. This funding boost, outlined in the IRS's strategic operating plan to spend the funds over the next 10 years, enables the agency to allocate more resources toward transfer pricing cases (see Tax Alert 2023-0710). By bolstering its capabilities, the IRS aims to strengthen its ability to identify and address instances of improper transfer pricing practices (see Tax Alert 2023-0951).

Implications

The IRS's transfer pricing initiative is a proactive approach to addressing tax compliance for large foreign-owned corporations. Given the increased focus on transfer pricing, taxpayers should consider enhancing their transfer pricing documentation so they can support their intercompany tax positions with reliable and consistent data in each jurisdiction to support their transfer pricing. Taxpayers with inadequate transfer pricing documentation risk an increased likelihood of controversy and transfer pricing adjustments.

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Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor

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ENDNOTE

¹ Alexander Rifaat, Biden Signs Debt Ceiling Bill Into Law, Tax Notes Today (June 3, 2023).