In a recent news release, the IRS launched new initiatives using the Inflation Reduction Act funding to ensure foreign-owned companies are paying their US taxes. After more than a decade of budget cuts, the IRS is taking swift action.
What is happening?
Listed as the first initiative in its press release, the IRS is targeting large foreign-owned corporations, focusing on their transfer pricing policies. The IRS first sent transfer compliance alerts to approximately 150 subsidiaries of large foreign-owned corporations. However, we’ve recently learned and seen that the IRS has expanded this to small to mid-sized companies. The IRS is providing an opportunity for US taxpayers to self-correct their US tax position and remit tax, if necessary, before engaging in a multi-year audit.
Why?
The aim is to increase compliance efforts on the US subsidiaries of foreign-owned companies that distribute goods in the US and do not pay their fair share of US tax on the profit they earn on their US activities. The IRS is focused on taxpayers that have reported losses or exceedingly low margins year after year. The IRS believes that these companies are improperly using transfer pricing to avoid reporting an appropriate amount of US profits on their US activities.
What to do?
The first step in determining how to proceed is to evaluate your transfer pricing results. The IRS compliance letters state that taxpayers should evaluate their transfer pricing policy, intercompany agreements, financial results, and filed tax returns to ensure compliance with Internal Revenue Code (IRC) Section 482 and the Treasury regulations thereunder. These analyses are standard components of the preparation of transfer pricing documentation. If you are fully compliant and have proper documentation, no additional action is necessary.
If you are not compliant, please contact your GBQ tax advisor to assist you in evaluating your transfer pricing policies. We have a dedicated team which specializes in evaluating your risks and developing a practical approach to address your transfer pricing needs.
Summary
With the support of additional funding, the IRS is emphasizing transfer pricing compliance for foreign-owned distributors and taxpayers should ensure their transfer pricing policies are in place. If no self-correction is made to improve reported profits, taxpayers are likely to be selected for audit.
