IRS Budget Boost May Increase Transfer Pricing Scrutiny

Kevin Otero spoke with Law360 about how the IRS funding boost included in the Inflation Reduction Act could increase the number of cross-border intercompany transactions, potentially putting a new spotlight on long-standing transfer pricing issues.

According to Kevin, the budget increase could bring more targeted IRS scrutiny of multinationals that aren't accustomed to in-depth audits. "The IRS is already bumping up scrutiny in certain areas, such as TCJA campaigns," Kevin said. "But with additional resources, I think there may be companies — perhaps who may have had a lighter touch from the IRS — who should expect something different going forward. Though it will take time for the IRS to ramp up."

Kevin explained that most companies have a clear sense of what their uncertainty is, the potential exposures they're facing, and the portfolio of tax risks that they're managing. "In areas like transfer pricing — which multinationals have no choice but to grapple with — there's always judgment," he said. "Companies ask, 'How do we price a given intercompany transaction and are we off, and by how much?'"

Companies subject to increased IRS scrutiny should anticipate the likely areas of IRS focus, he observed, adding they should also "refresh the assessment of the merits of their tax positions and prepare an audit defense strategy."

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