Tax News and Developments October 2023
In brief
On 20 October 2023, the IRS issued a press release announcing a new initiative to send compliance alerts to roughly 150 US subsidiaries of large foreign corporations that distribute goods in the United States to challenge transfer pricing practices that it alleges resulted in improper losses and exceedingly low margins year after year. Further, in 2024 the IRS will expand the Large Corporate Compliance (LCC) program to include audits of an additional 60 corporate taxpayers selected using artificial intelligence (AI) and input from subject matter experts.
In more detail
These initiatives aimed at large corporations follow initiatives announced earlier this year targeted at (1) high-wealth individuals and (2) complex partnerships. In our previous client alert, IRS Warns of Imminent Compliance Alert and Examinations for Large Partnerships, we discussed how these campaigns align with the IRS’s objective in its Inflation Reduction Act Strategic Operating Plan to address the burgeoning tax gap by expanding eforcement efforts against taxpayers with complex tax filings and high-dollar noncompliance.
With respect to the transfer pricing initiative, the IRS is sending compliance alerts to approximately 150 subisdiaries of large foreign corporations to incentivize self-corrective measures with respect to alleged improper transfer pricing practices that misreported the amount of U.S. profits. The press release did not include details on when these compliance alerts would be issued.
With respect to the LCC initiative, the IRS must wait for newly-hired accountants to start at the beginning of the year to expand the LCC program, which includes the largest and most complex corporate taxpayers. These taxpayers have average assets of more than USD 24 billion and average taxable income of over USD 500 million per year. Here, as in other spaces, the IRS has announced its intent to leverage AI in the data analytics used to select taxpayers for audit.
The IRS is uniquely positioned with access to all US taxpayers’ filing data. In fact, the press release closed with statistics on the more than one million forms the IRS digitalized in 2023 and addressed some of the implications of extracting data from digital records. Given the extensive data sets available to the IRS, the increasing push toward global transparency and cooperation, and the predictive modeling capabilities of AI technology, the IRS will have access to information that is simply unavailable to taxpayers. Companies who may find themselves targeted by either the large foreign-owned corporations transfer pricing initiaitive, the expansion of the LCC program, or other campaigns should carefully review their litigation risk profile.
The press release also included a reference to the government’s Tenth Circuit victory in Bats Global Markets Holdings Inc. et al. v. Commissioner to illustrate the sucessful IRS campaign to address high-risk claims related to the domestic production activities deduction under former section 199.
