Thought Leadership - Roedl-VL

IRS Transfer Pricing Enforcement: What Your Company Needs to Know
 
On October 20, 2023, the IRS unveiled its new transfer pricing enforcement initiative in response to the increased funding provided by the Inflation Reduction Act. This legislation allocated $80 million to the IRS for enhancing tax compliance efforts and other activities.
 
What have we observed so far? The IRS has directed its attention toward medium and large foreign-owned businesses as part of this initiative. Their goal is to ensure fair tax treatment and address any potential tax avoidance practices.
 
Similar to the now retired 2017 “Inbound Distributor Campaign,” the IRS’ new initiative targets U.S. inbound distributors involved in the purchase and sale of tangible goods from foreign related parties that also have reported losses or low profit margins during the period 2017 to 2021. The IRS has identified approximately 150 subsidiaries of foreign corporations, raising concerns about their transfer pricing practice. Taxpayers who do not fall under the defined target group of the IRS' campaign (e.g. operating not only as a distributor but also as a manufacturer) have also received IRS letters. Transfer pricing studies validate that an appropriate amount is paid or received for these transactions.
 
The IRS letters sent out to the selected companies either put companies on notice or request a response, urging either an internal review of compliance with Section 482 or actions to remedy noncompliant tax returns. To this date, we have seen two types of IRS letters – Form 6607 and Form 6608.
 
Form 6608 calls for internal evaluation of the taxpayer’s transfer pricing policy, intercompany agreements, financial results, and Form 1120 for compliance with IRC section 482. Whereas in letter 6607, the taxpayer is actively required to respond and given a due date for their response. The response letter to Form 6607 could be quite extensive.
 
Importantly, receiving either IRS letter 6607 or letter 6608 does not imply that your company is or will be subject to an audit in the near future. However, it does indicate that your tax filings are being monitored by the IRS and that the continued reporting of losses or low margins may result in a referral for a transfer pricing examination.