- IRS Transfer Pricing Notice Letters: Foreign-owned taxpayers who ignored IRS notice/compliance letters may likely be referred for audit. Letters were initially sent to foreign-owned distributors with low margins or losses as part of the IRS inbound distributor campaign.
- Preparing for Year‑End: As many taxpayers approach year‑end, they should scrutinize their transfer pricing results to help ensure that they are adjusted, as necessary, to align with their policies and the arm’s-length standard.
Background on Transfer Pricing Concerns
Last year, the IRS embarked on a new Large Business and International (LB&I) campaign to address transfer pricing issues concerning the intercompany transactions of foreign-owned corporations engaged in distribution activities in the United States. Specifically, the IRS was targeting taxpayers who reported low margins or losses on recently filed Forms 5472. This initiative was part of a broader strategy to enhance enforcement for partnerships, high-net-worth individuals, and corporations, utilizing additional resources made available through the Inflation Reduction Act (IRA).
Since the start of the campaign, it has been reported that the IRS has issued some 180 transfer pricing notice letters that were designed to encourage self-review and correction, if appropriate, of transfer pricing positions related to inbound distribution transactions. Some letters requested support for prior positions reported on tax returns, and almost all letters requested that taxpayers file amended tax returns and respond to the letter if taxpayers judged that they hadn’t fully complied with Internal Revenue Code (IRC) Section 482. Read our article, “Transfer Pricing Scrutiny on the Rise Due to the IRA,” for more details.
Many taxpayers who received such letters are understood to have responded in one way or another, including providing support for their transfer pricing in the form of a transfer pricing documentation study. Forvis Mazars assisted several clients in responding to these letters. Some taxpayers made transfer pricing adjustments and refiled tax returns, while others are known to have considered double tax relief strategies or requested more time to respond to the letter. On the other hand, some taxpayers chose not to respond.
Transfer Pricing Compliance & What to Expect
Taxpayers who responded to the compliance letters may receive follow-up communications from the IRS. Those whose explanations are deemed unsatisfactory may still be referred for examination. Those who did not respond, if explicitly requested to do so, are likely to face a future transfer pricing audit.
The inbound distributor campaign is now listed as a “not currently active campaign” on the LB&I compliance campaign website. Accordingly, it seems that this campaign has concluded. Reports suggest that the IRS is pleased with the campaign results and that similar campaigns will follow.
As this recent campaign has shown, transfer pricing results are being more closely scrutinized. Taxpayers should, therefore, remain proactive on transfer pricing matters to help ensure their transfer pricing methodologies, policies, and results align with the arm’s-length standard and are thoroughly documented. As we approach year-end for many taxpayers, companies should consider reviewing their forecasted annual transfer pricing results and evaluate whether any adjustments to the pricing may be needed prior to and/or after year-end.
Looking ahead, we expect the IRS to maintain its rigorous enforcement of transfer pricing compliance. The heightened scrutiny, amplified by additional resources made available through the IRA, will likely result in more audits and a closer examination of intercompany transactions and accompanying transfer pricing documentation. The application of transfer pricing penalties also is expected to increase.
Lastly, monitoring the progress of IRS compliance initiatives will be important. It is helpful that the IRS is public with compliance campaigns, and in recent years, we have seen a lot of action following the announcement of new campaigns. The IRS states on its website that these campaigns represent the first wave of LB&I’s issue-based compliance work and that more campaigns will continue to be identified, approved, and launched in the coming months.
How Forvis Mazars Can Help
If you received an IRS compliance letter or want to evaluate or strengthen your transfer pricing policy and/or documentation, our experienced transfer pricing team can offer guidance and support. If you have questions or need assistance, please contact a professional at Forvis Mazars.