On January 31, 2017, the IRS announced that its Large Business and International (“LB&I”) division will focus on issue-based examinations.
Under this approach, the LB&I division will utilize and develop specialized IRS knowledge and resources to successfully run compliance campaigns targeted towards several key risk areas.
Of the 13 campaigns selected for this initial rollout, the following are most pertinent to the mid-market community:
Related Party Transactions Campaign: while the IRS' focus on related party transactions within large multinational corporations is not new, the current campaign specifically identifies the mid-market segment as an area of interest for the IRS' Enterprise Activities practice area. Furthermore, this campaign encompasses a broad spectrum of transfer pricing issues, from compliance with Section 1.482 of the U.S. Treasury Regulations to reasonable compensation and broader tax structures.
Repatriation Campaign: the IRS' Cross Border Activities practice area announced its interest in examining the different repatriation structures used by U.S. multinationals. Under this campaign, LB&I will conduct examinations on identified, high-risk repatriation issues.
Inbound Distributor Campaign: LB&I has developed a comprehensive training strategy for the Inbound Distributor campaign that will aid IRS agents as they examine U.S. distributors of goods sourced from foreign-related parties. The IRS’ focus will be on distributors that have “incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed.” In these cases, the IRS will be looking to demonstrate that the U.S. distributor should be earning higher returns in an arms-length transaction.
These initial campaigns signal the IRS's increased focus on the mid-market community. When combined with the quickly changing global BEPS landscape, 2017 presents a good opportunity for our mid-market clients to proactively examine their transfer pricing and related tax structures to prepare for the expected increased scrutiny from the IRS and foreign tax authorities.
Further details regarding these campaigns and others can be found here.