Transfer Pricing Audits: IRS Additional Funding for Tax Enforcement

As part of the Inflation Reduction Act enacted into law by the Biden Administration in August 2022, $80 billion in additional funding was granted to the IRS. Half of this new funding will be dedicated to compliance enforcement with an expected focus on transfer pricing activity.

A persistent national public deficit and mounting pressure to combat tax avoidance by multinational groups have built momentum for increasing scrutiny of intercompany transactions, since multinationals use transfer pricing to optimize their taxes. IRS is looking to use the additional resources to reinforce its capabilities, not only to increase the odds of transfer cases being brought to the Tax Court docket, but also to improve its risk assessment and case selection processes.

Transfer pricing cases can be complex and take years to resolve. The IRS can use its additional resources to further examine both old and new transfer pricing cases, as well as to expand the number of taxpayers being audited. In the coming months, IRS will clarify its strategy.

Transfer pricing audits can be challenging, expensive, time-consuming and stressful, especially if the taxpayer is not clear about “de facto” transfer pricing policies and if supporting documentation is not available or is outdated. Sound preparation for a transfer pricing audit includes ensuring transfer pricing policies are consistent with the functions, assets and risk profile of the entities of the group; keeping intercompany agreements updated; and creating adequate documentation on a timely basis.

While multinational groups assign significant resources to address transfer pricing issues, it is not uncommon for mid-market groups with international operations to overlook transfer pricing as a serious risk. The additional resources IRS will now have available for tax enforcement will result in an increase of transfer pricing audits. It is highly recommended that companies with international operations take action on audit preparedness and have appropriate transfer pricing supporting documentation.

For additional questions, please contact your Marcum tax advisor.