The Inflation Reduction Act, which was enacted on August 16, 2022, will give the IRS billions to go into what the Wall Street Journal called “beast mode.” The Act allocates nearly $80 billion in new funding for the IRS. Of that $80 billion, more than $45 billion is for enforcement (including the determination and collection of “owed taxes”), more than $25 billion is for operations, nearly $5 billion is for systems modernization, and over $3 billion is for customer service, among other expenses.
That money is more than six times the current annual IRS budget of $12.6 billion.
The increased funding for IRS enforcement will significantly increase the IRS’s scrutiny of transfer pricing compliance. As we have previously shared in this blog, if a taxpayer’s tax return includes IRS Forms 5471 or 5472, a transfer pricing study is an essential piece of the overall compliance package. Transfer pricing compliance applies to all U.S. companies with transactions between either a foreign subsidiary or a foreign parent company. IRS transfer pricing rules require that intercompany pricing between a U.S. company and a foreign affiliate must be based on an “arm’s length” price that would be charged in a similar transaction with an unrelated third party. U.S. transfer pricing is enforced under the authority of IRC Section 482, which allows the IRS to reallocate gross income, deductions or credits between two or more organizations and, under Section 6662, impose substantial penalties (as much as 40% of the deemed tax underpayment) for failed transfer pricing compliance.
Given the new budget for an army of IRS agents, taxpayers should consider enhancing their transfer pricing documentation so they can support their intercompany tax positions. Based on Publication 5300, Transfer Pricing Examination Process, this means taxpayers need to have 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.
McGuire Sponsel’s Global Business Services team can assist you with all aspects of transfer pricing planning and compliance. If you have any questions about our team or any global business or compliance issue, do not hesitate to reach out.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.