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The IRS Has Not Forgotten About Corporate Tax Compliance by STEVEN TOSCHER and PHILIPP BEHRENDT

The IRS has recently made big headlines about focusing enforcement initiatives on wealthy individuals, but we have not heard so much about the focus on corporations -until this week. Yes—corporations are part of the tax gap.   

The recent IRS announcements regarding new corporate tax compliance initiatives mark the beginning of a new  phase in the relationship between the IRS and large corporations. With the agency taking significant steps to ensure that businesses fulfill their tax obligations, it is essential for corporations to understand  these initiatives and get ready to deal with the new reality of a greater focus on corporate compliance.

On October 20, 2023, the IRS released its second quarterly update, shedding light on how Inflation Reduction Act (IRA) funds are being utilized and the implementation of priorities. The update unveiled three  corporate tax compliance initiatives, underscoring the IRS’s commitment to  holding corporations accountable for their tax responsibilities.

1.      Transfer Pricing Soft Letter Compliance Alerts for Foreign-Owned Corporations: The IRS is set to send “compliance alerts” to approximately 150 U.S. subsidiaries of foreign corporations, indicating potential misuse of transfer pricing tactics to report diminished profits on domestic activities. These alerts  suggest it’s time to take a hard look at the company’s transfer policies and practices and start getting ready to head off or prepare for a transfer pricing examination.

2.      Expansion of Large Corporate Compliance Program: In conjunction with its plan to hire 3,700 new revenue agents , the IRS is expanding  its large corporate compliance program. The program scrutinizes large corporate taxpayers with substantial assets, meaning average assets of more than $24 billion, and average taxable income of approximately . $526 million per year. The expansion includes initiating an additional 60 audits of major corporations in early 2024 increasing  the examination of these businesses. The IRS will apply a combination of artificial intelligence and subject matter expertise in an effort  to crack down on  noncompliance.

3.       Abuse of Repealed Corporate Tax Break: The IRS emphasized its  efforts to address  what it considers the abuse of the section 199 deduction for domestic production, which was repealed in the 2017 Tax Cuts and Jobs Act. These efforts have borne fruit, highlighted by a significant victory for the IRS in Bats Global Markets Holdings Inc. v. Commissioner (No. 22-9002, 2023 WL 4482553 (10th Cir. July 12, 2023)).

The IRS’s corporate tax compliance initiatives represent a significant step forward in the agency’s pursuit of fiscal accountability. While the path ahead promises to be challenging, corporations can proactively prepare and protect their interests. The guidance of experienced tax professionals is instrumental in effectively addressing IRS initiatives, preserving corporate rights, and navigating the  landscape of corporate tax compliance. 

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