Just over a year ago, the IRS––armed with Inflation Reduction Act (IRA) funding and resources––announced how the increased funding would be put to use. Enforcement initiatives were aimed at corporate taxpayers and included “a large foreign-owned corporations transfer pricing initiative.” As part of the transfer pricing initiative, the IRS sent “compliance alerts” to 150 subsidiaries of large foreign corporations with a goal to “incentivize self-correction.” By November, the IRS had sent alerts to more than 180 subsidiaries. Considerable resources have been devoted to transfer pricing initiatives, and recent IRS announcements shed light on transfer pricing as an area of continued focus.

The compliance alerts, or “nudge letters,” were sent to taxpayers the IRS identified as presenting a compliance risk based on their use of certain transfer pricing strategies. The letters request that the taxpayer explain its compliance with I.R.C. § 482, or to amend noncompliant returns. Most of the compliance alerts have received responses. However, those who have not responded to the alerts, or those whose documentation or explanation was deemed insufficient, have been referred for audit and should be expecting to see examination notices soon.

This wave of transfer pricing initiatives is likely the first of many. Even taxpayers who have not yet received a nudge letter should review their transfer pricing documentation for completeness, i.e., containing the 10 principal documentation requirements of Treas. Reg. § 1.6662-6(d)(2)(iii)(B), adequacy, and reasonableness. Taxpayers with inadequate documentation do not only risk audit referral, they also risk exposure to 20% or 40% penalties under I.R.C. § 6662(e). The IRS recommends a “best practice” of undertaking a self-assessment of potential indicators of transfer pricing noncompliance to anticipate and proactively correct possible concerns.

Taxpayers can consider requesting an Advance Pricing Agreement to bring some certainty to their transfer pricing. Taxpayers who meet certain eligibility requirements can also consider proactively participating in the Compliance Assurance Process (“CAP”) Program. The CAP Program was launched in 2005, but has been recently revamped with the increased IRA funding. The program facilitates real-time IRS review of transfer pricing strategies and transactions. While the application period for acceptance into the 2025 program closed today, taxpayers should keep an eye on the program’s outcomes to determine whether to participate in later years.