IRS Transfer Pricing Enforcement Initiatives

Rödl & Partner Tax Matters, published December 8, 2023

On October 20, 2023, the IRS announced its new transfer pricing enforcement initiative as result of increased funding under the Inflation Reduction Act. Some of our clients have been impacted by this effort.

Similar to the now retired 2017 “Inbound Distributor Campaign,” the IRS’ new initiative targets U.S. inbound distributors involved in the purchase and sale of tangible goods from foreign related parties that also have reported losses or low profit margins during the period 2017 to 2021. The IRS has identified approximately 150 subsidiaries of large foreign corporations, raising concerns about their transfer pricing practice. Taxpayers who do not fall under the defined target group of the IRS' campaign (e. g. operating not only as a distributor but also as a manufacturer) have also received IRS letters.

The IRS letters sent out to the selected companies either put companies on notice or request a response, urging either an internal review of compliance with Section 482 or actions to remedy noncompliant tax returns. Several of our clients are in receipt of such IRS letters. To this date, we have seen two types of IRS letters – Form 6607 and Form 6608.

Form 6608 calls for internal evaluation of the taxpayer’s transfer pricing policy, intercompany agreements, financial results, and Form 1120 for compliance with IRC section 482. Whereas in letter 6607, the taxpayer is actively required to respond and given a due date for their response. The response letter to Form 6607 could be quite extensive.

Importantly, receiving either IRS letter 6607 or letter 6608 does not imply that the company is or will be subject to an audit in near future. However, it does indicate that its tax filings are being monitored by the IRS and that the continued reporting of losses or low margins may result in a referral for a transfer pricing examination.

Our firm is actively working to advise affected clients. If you have received either IRS letter 6607 or 6608 and need assistance with this matter, please connect with our Transfer Pricing practice for guidance and support with this matter.

This is a critical matter, and we want to ensure our clients feel supported.

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