US | Increased IRS funding from Inflation Reduction Act will likely affect transfer pricing cases

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EY Global
19 Aug 2022
Subject Tax Alert
Categories Corporate Tax Transfer Pricing
Jurisdictions United States

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  • Increased funding for IRS enforcement, provided under the newly enacted Inflation Reduction Act, will likely increase IRS scrutiny of transfer pricing cases.

  • Taxpayers should proactively enhance their transfer pricing documentation and consider tax dispute resolution tools.

The United States (US) Inflation Reduction Act (pdf) (IRA), enacted on 16 August 2022, allocates nearly US$80 billion1 in new funding for the Internal Revenue Service (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.

The Congressional Budget Office estimates the enforcement-related funding will raise $204 billion in additional revenue, offsetting the cost of the Act's incentives for energy transition and renewable energy, as well as its extension of the expiration date for expanded premium tax credits under the Affordable Care Act.

Implications

The increased funding for IRS enforcement will likely shift the current audit landscape and significantly increase the IRS's scrutiny of transfer pricing cases. Accordingly, taxpayers should consider enhancing their transfer pricing documentation so they can support their intercompany tax positions.

Based on Publication 5300, Transfer Pricing Examination Process (pdf), 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.

Besides enhanced documentation, taxpayers should consider using tax dispute resolution tools, such as ICAP,2 Advance Pricing Agreements, and Mutual Agreement Procedures. With the IRS audit environment poised to change in the future, taxpayers need to prepare.

 

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services, Transfer Pricing
  • Ryan J. Kelly, Americas ITTS Tax Controversy Leader, Washington, DC
  • Katherine Pinzon, Americas & US West Transfer Pricing Leader, Houston
  • Heather Gorman, Washington, DC
  • Amber Medina, New York


For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.

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    1. Currency references in this Alert are to the US$.

    2. OECD International Compliance Assurance Programme (ICAP) is a voluntary risk assessment and assurance program to facilitate open and co-operative multilateral engagements between multinational enterprise groups willing to engage actively and transparently and tax administrations in jurisdictions where they have activities.