December 6, 2023

IRS Alerts Signal Imminent Transfer Pricing Audits

IRS Alerts Signal Imminent Transfer Pricing Audits Transfer Pricing

Using funds from the Inflation Reduction Act, the IRS recently announced new initiatives to ensure large corporations pay taxes owed. Referred to as the “Large foreign-owned corporations transfer pricing initiative,” the goal is to target subsidiaries of foreign companies that distribute goods in the US and consistently report losses or exceedingly low margins year after year as attributed to improper use of transfer pricing.

Losses and Low Margins Presumable to Be Non-Arm’s Length

Letters will be distributed from the IRS to potential non-compliant entities communicating the expectations for US limited-risk distributors and the reporting of recurring losses or low margins. Via these letters, the IRS is encouraging taxpayers to voluntarily comply and self-adjust their tax records. The focus of this oversight is on non-arms length transactions that could potentially enlarge the U.S. tax base. Taxpayers who are confident in their adherence to the transfer pricing rules outlined in IRC Section 482 are not obligated to take additional steps. However, the IRS intends to keep an eye on their records and may conduct more in-depth reviews or audits if the pattern of losses and slim margins does not change.

Taxpayers should note that the option of filing a Mutual Agreement Procedure request under Rev. Proc. 2015-40, 2015-35 I.R.B. 236 is offered to alleviate the double taxation generated by the amended tax return position.

Preparing An Appropriate Transfer Pricing Study as the Best Strategy

Creating a transfer pricing study in compliance with Treas. Reg. § 1.6662-6 is the best way to manage transfer pricing risk. A well-prepared transfer pricing study will not only demonstrate that intercompany transactions adhere to the arm’s length principle by applying benchmarking analyses, but also explain and support the taxpayers’ transfer pricing positions. Additionally, it will help taxpayers avoid hefty penalties in case of a transfer pricing adjustment during an audit.

Audit Preparedness

More than ever, it is recommended that companies have the appropriate transfer pricing documentation supporting these strategies and policies. This preparation is crucial in the event of an audit. Marcum’s transfer pricing team stands ready to offer support in developing and documenting transfer pricing strategies tailored to your business needs.