The Inflation Reduction Act (IRA), enacted on August 16, 2022, allocates nearly $80 billion in new funding for the IRS. Of that $80 billion, more than $45 billion is for enforcement (including the determination and collection of "owed taxes"), more than $25 billion is for operations, nearly $5 billion is for systems modernization, and over $3 billion is for customer service, among other expenses.

The Congressional Budget Office estimates the enforcement-related funding will raise $204 billion in additional revenue, offsetting the cost of the Act's incentives for energy transition and renewable energy, as well as its extension of the expiration date for expanded premium tax credits under the Affordable Care Act.

Implications

The increased funding for IRS enforcement will likely shift the current audit landscape and significantly increase the IRS's scrutiny of transfer pricing cases. Accordingly, taxpayers should consider enhancing their transfer pricing documentation so they can support their intercompany tax positions. Based on Publication 5300, Transfer Pricing Examination Process, this means taxpayers need to have reliable and consistent data in each jurisdiction to support their transfer pricing. Taxpayers with inadequate transfer pricing documentation risk an increased likelihood of controversy and transfer pricing adjustments.

Besides enhanced documentation, taxpayers should consider using tax dispute resolution tools, such as ICAP, APAs, and MAPs. With the IRS audit environment poised to change in the future, taxpayers need to prepare.

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