Tax Controversy 2026 Comparisons

The US federal tax system is voluntary – ie, taxpayers are responsible for calculating their tax liabilities correctly and filing timely tax returns, including amended returns to request refunds of amounts paid. Civil tax controversies in the US generally arise in one of two ways:

• from Internal Revenue Service (IRS) audits that result in determinations that taxpayers did not report sufficient tax on their tax returns; or
• where the IRS denies or fails to act on refund claims for taxpayers claiming they overpaid tax, interest or penalties.

Federal civil tax disputes are not limited to federal income tax: they can also arise with respect to employment/payroll, estate, gift and excise taxes. They are not limited to a taxpayer’s substantive tax liability and can also arise in other contexts. For example, a taxpayer denied tax-exempt status or whose exempt status is revoked can challenge that determination. A taxpayer can also challenge worker classification (ie, independent contractor or employee status). And taxpayers and the government can engage in disputes regarding the IRS’s ability to collect information or to collect on a tax debt.

There are also federal criminal provisions that allow the US to prosecute taxpayers for tax-related crimes. The IRS has its own Criminal Investigation division that examines potential criminal violations, including tax evasion and tax fraud.

Finally, individual states have their own tax regimes. Disputes can also arise between states and taxpayers.

IRS enforcement generally focuses on income tax compliance. Most audits and disputes relate to the 150 million+ returns filed by individual taxpayers, which includes taxpayers generating income through pass-through business entities (eg, partnerships) and self-employment. In 2024, almost USD2.8 trillion was collected from individual income taxes, comprising nearly 55% of all federal tax revenue.

Approximately 2.4 million C corporation and 5.8 million S corporation returns are filed each year, and 5 million partnership tax returns. Tax collections from the 2.4 million C corporations totalled USD563 billion in 2024, making up 11% of all federal tax revenue. IRS data does not specify the amount of tax revenue that results from pass-through entities, since the tax liability is ultimately determined at the individual level, but available data indicates that pass-through entities earn more net income than C corporations, which indicates that tax revenue from pass-through entities and sole proprietorships is likely to be at least as large as that from C corporations, if not larger.

The IRS has dedicated groups for businesses and individuals operating as sole proprietorships or through pass-through entities, such as the Large Business & International and the Small Business/Self-Employed divisions, which are responsible for auditing and enforcing compliance with the tax laws applicable to corporations, partnerships and other business entities.

Large corporations and partnerships, particularly those with multinational operations, often face disputes over transfer pricing and related issues. The IRS closely scrutinises intercompany transactions and compliance in other areas – such as R&D credits, the characterisation of income as capital or ordinary, and the timing and amount of income and deductions. High net income and high net worth individuals and businesses operating through partnerships are also under increased scrutiny. The IRS has aggressively targeted perceived abuses, including partnership income allocations, basis adjustments, the ability of partners to include deductions or losses, and other income deferral strategies. Recent IRS deficiency notices relating to transfer pricing and large partnership income adjustments often exceed USD100 million in tax liability and can reach into the billions.

Customs duties (tariffs in particular) were an increasing focus of the new administration in 2025, although the landscape remains in flux following a recent US Supreme Court decision striking down the key tariffs imposed by the administration. The assessment and collection of tariffs is primarily vested in U.S. Customs and Border Protection (CBP), an agency within the Department of Homeland Security, rather than the IRS. The IRS and CBP may share certain information for enforcement purposes upon request and in the context of specific determinations.

For many large corporate taxpayers, tax controversies may be unavoidable. However, taxpayers can reduce the risk of a contentious audit by avoiding transactions or tax positions listed by the IRS as being subject to abuse and by seeking advance rulings (eg, private letter rulings or advance pricing agreements) from the IRS concerning the tax treatment of their transactions. For large corporations, the IRS’s Compliance Assurance Process (CAP) can help reduce controversy associated with complex tax reporting. CAP allows large corporate taxpayers and the IRS to identify and resolve issues before tax returns are filed. While CAP provides greater certainty and minimises post-filing disputes, CAP taxpayers and the IRS may still disagree on issues, which can ultimately lead to unresolved issues that proceed to controversy.

Taxpayers can take more active steps to reduce their exposure from tax controversies through meticulous record-keeping and documentation, and reliance on outside tax advisers. Ensuring that financial transactions, deductions and income sources are well documented and supported allows taxpayers to provide supporting evidence during an IRS audit that can reduce the potential for adjustments and reduce the likelihood of tax penalties. Once an audit has started, a taxpayer can avoid unnecessary controversy by being co-operative in responding to reasonable IRS information requests.

Over the past decade, governments across the world have focused increasingly on combatting perceived tax avoidance related to transfer pricing and other means by which companies can allocate income within their multinational operations to lower-tax jurisdictions. In addition to the US’s implementation of the Tax Cuts and Jobs Act (TCJA) in 2017, which introduced reforms aimed at reducing profit-shifting incentives (including the Base Erosion and Anti-Abuse Tax, Net CFC Tested Income, and Foreign Derived Deduction Eligible Income regimes), there have been significant changes in international tax law and guidelines from the Organisation for Economic Co-operation and Development (OECD) and its member countries.

These developments have resulted in substantial tax controversy with respect to the application of TCJA provisions and the validity of IRS regulations implementing them. The OECD’s measures against base erosion and profit shifting (BEPS) have not been formally adopted in the US, but have nevertheless influenced US tax controversies. In particular, the BEPS action items relating to transfer pricing have dovetailed with increased IRS enforcement and scrutiny on transfer pricing, contributing to more transfer pricing audits and litigation in this area. Importantly, the US has not implemented the OECD’s Pillar One or Pillar Two initiatives, and given the current administration’s position, is unlikely to adopt OECD prerogatives in the near term.

On 5 January 2026, the OECD released a “side-by-side” package establishing a safe harbour exempting multinational groups with ultimate parent entities in qualifying jurisdictions from the Pillar Two income inclusion and undertaxed profits rules. To date, the United States is the only jurisdiction deemed qualified for this safe harbour. However, qualified domestic minimum top-up taxes (QDMTTs) will continue to apply and could trigger more US controversy as taxpayers seek to avoid double taxation and potential punitive outcomes.

A taxpayer facing audit adjustments of taxes, penalties and interest can challenge those adjustments without paying the amounts by protesting the adjustment to the IRS’s Independent Office of Appeals (“IRS Appeals”). If that fails, the taxpayer can challenge the adjustments in the US Tax Court, also without paying them. If a taxpayer challenges the IRS’s adjustments in the Tax Court, the IRS is barred from assessing and collecting the tax until the Tax Court renders a decision. If the taxpayer loses in the Tax Court and seeks to appeal, the taxpayer can only avoid assessment and collection by posting a bond.

The Tax Court is the sole judicial forum for challenging IRS income tax adjustments without first paying the additional tax. A taxpayer always has the alternative of paying the disputed tax, filing an administrative refund claim, and suing the government for a refund in the appropriate US District Court or the US Court of Federal Claims.

There are deposit procedures available to a taxpayer that seeks to avoid interest on the taxes and penalties due should the taxpayer lose a challenge in the Tax Court.

The IRS uses a combination of data analytics, statistical models and risk-based criteria to select taxpayers for audits. While some audits are randomly selected, most are initiated based on specific risk factors or compliance issues, previous audit finding, and inconsistencies or information reported in tax filings. Based on recent IRS guidance, the below taxpayers or issues may present a higher likelihood of audit.

High-Risk Taxpayers

Certain groups of taxpayers are more likely to be audited based on their income levels, business activities or financial transactions.

• High income and high net worth individuals: taxpayers earning over USD5 million annually are more frequently audited due to the complexity of their income sources, deductions and potential foreign holdings. The IRS scrutinises offshore accounts, tax shelters and large, in-kind charitable deductions.
• Large corporations and partnerships: businesses with annual revenue exceeding USD10 million, particularly those engaged in international transactions or subject to specific IRS campaign issues, face heightened scrutiny from the IRS Large Business & International division.
• Cash-intensive businesses: industries that handle a large amount of cash, such as restaurants, convenience stores and car dealerships, may have a higher audit risk due to the potential for under-reported income.
• Cryptocurrency users: the IRS has increased enforcement on cryptocurrency transactions to ensure proper reporting of digital asset sales, trading and mining income. It remains to be seen whether this will continue under the current administration, which has already rolled back reporting regulations applicable to cryptocurrency brokers.
• Taxpayers claiming excessive deductions: individuals or businesses with unusually high deductions relative to income, such as home office deductions, charitable contributions or business expenses, may be flagged for audit.

Targeted Industries and Issues

The IRS periodically focuses on specific industries and issues based on compliance trends. Industries and areas currently under increased scrutiny include:

• technology and digital services – taxation of intangible assets, R&D credits and use of net operating losses;
• pharmaceuticals and medical devices – taxation of intangible assets, R&D credits, amortisation deductions and use of net operating losses;
• real estate – depreciation deductions, capital gains tax compliance, partnership-related issues and rental property losses; and
• professional services firms operating as partnerships – self-employment taxes, partnership income allocations and basis adjustments.

The IRS must generally initiate an audit within three years from the date a tax return is filed, because the IRS typically has only three years from when the tax return was filed to assess additional tax under the applicable statute of limitations. An audit does not suspend or interrupt the running of the limitations period. Because audits often begin long after the relevant returns are filed, the IRS typically secures one or more voluntary extensions of the limitations period from taxpayers to allow it to complete audits. If a taxpayer refuses to extend the limitations period, the IRS may issue a notice of deficiency, which suspends the limitations period on assessment while the taxpayer can petition the Tax Court (and if a Tax Court proceeding ensues).

Several exceptions extend the three-year limitations period on assessment. For example, if a taxpayer omits more than 25% of gross income, the period is extended to six years. In the case of a false or fraudulent return or the failure to file a return or certain informational forms with the tax return, the limitations period does not start until the relevant filing is made. Partnerships subject to the Bipartisan Budget Act’s centralised partnership audit regime follow a different audit life cycle, in which the relevant period of limitations applies to partnership adjustments rather than partner-level tax assessments.

Large corporate or partnership audits can last two or three years or longer. A taxpayer will typically need to extend the limitations period on assessment at the end of an unagreed audit to pursue an administrative appeal. This is because IRS Appeals typically requires at least one year remaining on the limitations period when a case is transferred to it.

The location of a tax audit depends on the type of audit and the complexity of the taxpayer’s return. Correspondence audits are conducted entirely by mail, with taxpayers submitting documents relating to specific tax return items. Field audits can occur either at an IRS office, where the taxpayer appears and answers questions or provides documentation, or at the taxpayer’s business or home, where the IRS can review records and interview the taxpayer. The IRS requests both hard copy and electronic records, with electronic production becoming increasingly prevalent as taxpayers’ records shift away from paper record-keeping. It is already common in large audits for all records to be provided electronically.

In large transfer pricing and other complex cases, IRS audits can also involve witness interviews (transcribed or not) and site visits or facilities tours.

The IRS regularly issues guidance regarding enforcement priorities and initiatives, in which it identifies various legal issues and transactions of interest. Of particular note are the IRS Large Business & International compliance campaigns, which identify issues and areas the IRS believes pose compliance risks. There are currently several dozen active campaigns.

Key audit issues include:

• international reporting requirements;
• transfer pricing;
• foreign tax credits;
• research credits;
• partnership-related income allocations and basis adjustments; and
• cryptocurrency transactions.

The IRS regularly issues guidance (usually sub-regulatory) relating to these areas and has devoted substantial resources to improving compliance and its own enforcement capabilities.

The US has long had tax treaties and tax information exchange agreements (TIEAs) with many other countries; there are currently 66 tax treaties and over 30 TIEAs. Key jurisdictions with which the US does not have a tax treaty are Argentina, Brazil, Hong Kong and Singapore, although TIEAs are in place with Argentina, Hong Kong and Singapore.

Taxpayers are often unaware whether the IRS has requested information under an exchange of information agreement in connection with an audit. Public reporting suggests the IRS regularly requests information under these agreements in connection with compliance issues relating to foreign operations or assets (especially with respect to the voluntary reporting of offshore bank accounts or other types of accounts). In the foreign tax credit and transfer pricing contexts, the IRS may use treaties or TIEAs to collect information if the taxpayer does not or cannot provide it.

Joint tax audits remain relatively rare in the US, but the IRS has in recent years indicated a greater interest in joint examinations with treaty partners in lieu of the traditional advance pricing agreement (APA) or mutual agreement procedure (MAP) processes for factually intensive and complex issues, such as transfer pricing.

A well-prepared response to an IRS audit can reduce the chances of tax adjustments, penalties and further enforcement actions. Key strategic considerations include the following.

• Engaging experienced tax professionals: taxpayers should consider retaining a tax attorney early in the audit process to ensure responses to audit enquiries are managed with the potential downstream effects in mind. Preserving privileges and avoiding admissions against interest are important considerations.
• Maintaining proper documentation: taxpayers should keep organised records with respect to tax return positions, and retain other evidence demonstrating the exercise of ordinary business care with respect to those positions. This is critical to substantiating positions and avoiding accuracy-related penalties.
• Co-operating without over-disclosing information: taxpayers should provide only the information requested by the IRS, to avoid expanding the scope of the audit. Care should also be taken to avoid the disclosure of privileged materials or other confidential or otherwise protected materials.
• Negotiating a settlement through the IRS auditor/examiner or IRS Appeals: resolving disputes at the administrative level can save time and money while providing certainty and confidentiality. IRS auditors (often referred to as examiners), who are part of the IRS examination function, can only resolve an issue based on their view of the merits and cannot settle cases based on the hazards of litigation. Only IRS Appeals is authorised to settle cases before litigation based on the anticipated hazards of litigation. Taxpayers should consider protesting disputed issues to IRS Appeals.

After the conclusion of an audit, the IRS examiner will either accept the return as filed or propose adjustments. If the taxpayer does not agree with the proposed adjustments, the examiner will send a final examination report and a 30-day letter. The 30-day letter gives the taxpayer 30 days in which to file a protest to initiate an administrative appeal. This 30-day period is frequently extended by agreement. In rare instances, the IRS may deny a taxpayer access to IRS Appeals, either by not issuing a 30-day letter or by designating the case for litigation.

An IRS Appeals team will review the case in a way that is supposed to be fair to both the taxpayer and the examination team, taking into account the hazards of litigation. The taxpayer and the examination team will each present their case to IRS Appeals, and the taxpayer and IRS Appeals will then have an opportunity to negotiate a potential settlement.

If the taxpayer decides not to respond to the 30-day letter or does not resolve the issue with IRS Appeals, the IRS will send the taxpayer a notice of deficiency, which gives the taxpayer the right to file a petition for redetermination in the Tax Court. If the taxpayer disagrees with the notice of deficiency but wishes to contest the tax in a forum other than the Tax Court, the taxpayer must pay the tax shown due in the notice of deficiency, file a claim for refund with the IRS, and, after the IRS denies the claim for refund or has taken no action on the refund claim after six months, sue for a refund in a federal district court or the Court of Federal Claims.

After a taxpayer submits its protest (ie, administrative appeal) to the IRS examiner, the latter will prepare a rebuttal and then submit the examination file, 30-day letter, protest and rebuttal to IRS Appeals. IRS Appeals does not have any statutory deadlines for resolving the case, but the statute of limitations on assessment is not suspended during the administrative appeals process (which is why the IRS will seek an extension from the taxpayer). As noted in 2.2 Initiation and Duration of a Tax Audit, the IRS will require there to be at least a year remaining on the limitations period on assessment to transfer the case to IRS Appeals. IRS Appeals aims to generally resolve the case within six to 12 months of receiving the case from the examiner. Complex cases, however, often take longer to resolve (sometimes up to three years).

If the IRS’s actions are causing undue delay, IRS Appeals is unresponsive or the IRS Appeals Officer is violating the Taxpayer Bill of Rights, the taxpayer can seek assistance from the Taxpayer Advocate Service to help facilitate a solution.

If a taxpayer files a claim for refund (either prior to or in connection with an IRS audit), the IRS will generally respond by either accepting or denying the refund claim, but there is no specific time within which the IRS must act in connection with a taxpayer’s refund claim. On the other hand, taxpayers must be mindful of the statute of limitations for filing a refund suit in the appropriate district court or the Court of Federal Claims, even when the IRS has not explicitly denied the taxpayer’s refund claim.

In general, a taxpayer can dispute the IRS’s determination in deficiency litigation in the Tax Court before paying or in a refund suit in the appropriate district court or the Court of Federal Claims after paying the disputed tax in full. The procedures for how tax litigation is initiated differ in some respects depending on the taxpayer or type of tax issues (eg, partnerships, employment taxes, tax collection cases).

For deficiency litigation, the taxpayer must file a Tax Court petition within 90 days from the notice of deficiency (150 days if the taxpayer has a foreign address). If the taxpayer wishes to pay first and litigate later, they must pay the disputed tax in full, file an administrative refund claim with the IRS (within the later of three years from the time the original return was filed or two years from when the tax was paid), and then sue for refund (after waiting six months or within two years of when the IRS disallows the claim) in the appropriate district court or the Court of Federal Claims.

The government would initiate criminal tax litigation by filing criminal charges.

Regardless of the forum (Tax Court or refund litigation), tax litigation follows a structured process, including case initiation, discovery, pre-trial motions, trial, post-trial briefing, decision and judicial appeals.

In the Tax Court, litigation begins when the taxpayer files a petition. The petition outlines the taxpayer’s objections to the notice of deficiency and the factual and legal bases supporting the taxpayer’s position. In district court or the Court of Federal Claims, the process starts with a complaint. In the Tax Court, the government is represented by IRS Chief Counsel. In refund litigation, the government is represented by the Department of Justice Civil Division. In each forum, the government files an answer to the petition or complaint (or, in relatively rare cases, a motion to dismiss if the government believes the court lacks jurisdiction).

Once the case is docketed, the parties engage in discovery, which may involve the exchange of documents, written interrogatories, requests for admissions, the exchange of expert reports, and fact and expert depositions. During this pre-trial phase, both sides may file pre-trial motions to narrow issues, dismiss or resolve legal claims, or exclude evidence.

If the case is not resolved in the pre-trial phase or does not settle, it proceeds to trial, at which the parties present their facts and arguments before a judge. Tax Court and Court of Federal Claims trials are always bench trials; there are no jury trials. In the district court, either party can demand a jury trial. Trials in all forums generally include opening statements, fact and expert witness testimony, cross-examination, and submission of documentary evidence.

Following trial, the court typically requests post-trial briefs, where the parties summarise their arguments and address key legal points. If a bench trial, the judge may take several months to issue a written opinion (or even years in complex cases). The court might require the parties’ computational input after rendering an opinion and before issuing a decision. The trial court proceeding is concluded with the entry of a decision reflecting the outcome.

If the taxpayer or government disagrees with the trial court’s decision, they can appeal to the appropriate US Court of Appeals and, ultimately, request review by the US Supreme Court.

In tax litigation, documentary and witness evidence plays a crucial role in proving a taxpayer’s claims. In general, taxpayers must substantiate the positions taken on their tax returns or in their refund claims. If a taxpayer cannot provide a factual basis for its positions, it will lose. In the absence of stipulations of fact, courts rely heavily on documentary evidence (such as financial records and business records) and fact and expert witness testimony to reach factual conclusions and render legal determinations.

Prior to trial, documentary evidence is initially exchanged during the discovery phase, where the parties request and review relevant documents and propose to stipulate such documents as exhibits. The parties may exchange expert reports, and interview or depose witnesses prior to trial. The Tax Court is technically less formal than the refund forums, though the differences among them narrow in large, complex cases.

During trial, documentary evidence is formally introduced as exhibits, often supported by witness testimony to explain the records. Fact and expert witnesses play a critical role. The parties can call witnesses and cross-examine the other party’s witnesses. The judge decides whether evidence is admissible. The factfinder (judge or jury) decides the factual outcome in accordance with legal principles set forth by the judge.

In civil tax cases, the burden of proof generally rests on the taxpayer, which must prove its case by a preponderance of the evidence. In certain cases, including transfer pricing cases, the taxpayer must also show that the IRS’s adjustment is arbitrary, capricious or unreasonable.

In cases involving penalties or fraud, the government must provide evidence supporting its claims (the burden of production). In criminal tax cases, the government always bears the burden of proving guilt beyond a reasonable doubt.

Taxpayers should carefully plan their litigation strategy to maximise their chances of success. The right strategies are case-specific, but key considerations include the following.

Evidence Needed to Win and Privilege Considerations

Taxpayers must generally disclose documents in response to discovery requests, but should take great care in determining which documents and fact and expert witnesses they need to present a credible case. Taxpayers should also carefully consider whether they need to rely on prior advice rendered by advisers to support their tax return position and mitigate accuracy-related penalties. If a taxpayer relies on an adviser’s advice in litigation, it will need to waive any legal privileges and provide the opinions and related materials to the government.

Summary Judgment and Settlement Possibilities

Most tax disputes docketed in federal court are resolved before trial. The parties might be able to negotiate a pre-trial settlement or to narrow or resolve the case via pre-trial motions.

Whether or Not to Pay Before Litigation

Choosing between the Tax Court (prepayment not required) and district court or the Court of Federal Claims (full prepayment required) depends on financial considerations and other case-specific factors.

Expert Reports

Expert witnesses can play an important role in many types of cases. In complex cases such as transfer pricing cases, experts in various disciplines often testify to assist the court in its analysis.

Prior domestic jurisprudence plays a crucial role in the US. The Tax Court follows its own precedent as well as that of the appellate court to which its decision may be appealed (see 5.1 System for Appealing Judicial Tax Litigation). Similarly, the district courts adhere to the precedent set by the Court of Appeals for their geography. The Court of Federal Claims adheres to Federal Circuit rulings. Ultimately, all courts are bound by decisions of the Supreme Court. While courts may consider non-binding decisions from other courts when making their rulings, those non-binding decisions are persuasive authority at best.

Treaties carry the force of law and are on par with statutes, whereas international guidelines such as the OECD Model Tax Convention do not. In transfer pricing cases, including those involving treaty countries, US courts apply the US transfer pricing statute and regulations, and are not bound by the OECD Transfer Pricing Guidelines or foreign rulings.

In the US, the 13 Circuit Courts of Appeals hear all federal tax appeals of trial court decisions. A taxpayer can appeal a decision of the Tax Court to one of the 12 Courts of Appeals covering the area in which the taxpayer has its principal place of business or principal office or agency (or for individuals, where the taxpayer’s legal residence is located) when the petition is filed. An appeal from a district court decision is heard by the individual Circuit Court responsible for the region in which the district court is located. All appeals from the Court of Federal Claims are to the Court of Appeals for the Federal Circuit.

After a decision on appeal, the taxpayer or the government can request rehearing either by the same three judge panel or by the full court (en banc). The losing party can seek review by the Supreme Court, but Supreme Court review is discretionary and generally granted only where there is a circuit split or a major constitutional or other issue that warrants the Supreme Court’s attention.

Taxpayers and the government have the right to appeal decisions of the Tax Court, district court or Court of Federal Claims. The appellate process starts with filing a notice of appeal and potentially ends at the Supreme Court.

A taxpayer must file a notice of appeal within 90 days of a Tax Court decision or within 60 days of a district court or Court of Federal Claims decision. If the other party did not already file a notice of appeal, that party can cross-appeal. The trial court forwards the record on appeal to the appellate court.

The parties each file their opening briefs, with the appellant filing first. The appellant can then file a reply brief. The appeals court might schedule oral arguments, where attorneys for both parties present their case and answer questions before a panel of three judges. In some cases, the court decides the appeal based on written briefs alone.

Appeals of trial court decisions are decided by panels of three appellate court judges with life tenure, who are appointed by the President and confirmed by the Senate. In certain cases, the appellate court may grant an en banc rehearing, where all active judges on the court review the decision of the three-judge panel. The number of judges on the individual circuits varies. The First Circuit currently has the fewest authorised judges, with six, while the Ninth Circuit currently has the most, with 29.

The Supreme Court is composed of nine justices with life tenure, who are appointed by the President and confirmed by the Senate. All nine justices hear and decide all cases, unless recusal by one or more justices is warranted.

The US tax system provides several ADR mechanisms to resolve tax disputes efficiently without litigation. These mechanisms are designed to reduce time, cost and complexity while facilitating resolution short of litigation. In recent years, the IRS has placed increased emphasis on expanding the use of ADR programmes, including through the creation of a dedicated ADR Program Management Office and the introduction of pilot programmes designed to encourage earlier and more frequent use of mediation and settlement tools.

ADR mechanisms are primarily facilitated by IRS Appeals and include fast-track settlement, early referral, the traditional IRS Appeals process, the rapid appeals process and post-appeals mediation. In the cross-border context, tax treaties may provide another ADR process to resolve bilateral issues under a treaty’s MAP article.

Fast-Track Settlement (FTS)

FTS is a voluntary process designed to resolve certain tax disputes efficiently before the traditional IRS Appeals process. The case is sent to FTS before a 30-day letter is issued and remains before the examination function while trained IRS Appeals mediators try to facilitate a mutually agreed resolution.

For large taxpayers, IRS Appeals tries to resolve cases within 120 days. For small taxpayers, the goal is 60 days. Because FTS is voluntary, the IRS does not need to accept the mediator’s proposal, even if the taxpayer would. Under a two-year pilot programme announced in 2025, FTS is now available on an issue-by-issue basis, and requests for FTS cannot be denied without the approval of a first-line IRS Executive (and denials require written explanation). 

Early Referral to IRS Appeals

This programme allows the taxpayer under audit to request a transfer of certain disputed issues to IRS Appeals before the audit is completed. This process enables faster resolution of disputes, as only specific issues are addressed rather than waiting for a full audit conclusion. Unresolved issues are returned to the audit and are not part of any subsequent IRS Appeals process.

Traditional IRS Appeals Process

IRS Appeals provides an independent administrative review of tax disputes before litigation. Unlike the IRS examination function, Appeals officers have the authority to settle cases based on the “hazards of litigation”, meaning they assess both sides’ relative risks of losing in court and can offer a compromise on that basis. In the traditional IRS Appeals process, a conference is held in which the examination function presents its case first and the taxpayer then presents its case. The examination function then departs, and the taxpayer and IRS Appeals try to negotiate a settlement.

Rapid Appeals Process (RAP)

The RAP is an elective process that is more like a mediation, in which IRS Appeals conducts a working session with the parties to try to resolve unagreed issues. If the RAP is unsuccessful, the traditional IRS Appeals process continues.

Post-Appeals Mediation (PAM)

Post-appeals mediation is used for disputes that remain unresolved after a taxpayer pursues the traditional IRS Appeals process. An Appeals mediator is assigned, as is a non-IRS co-mediator (if the taxpayer chooses), to help try to facilitate a settlement in a mediation session. Under the pilot programme mentioned above under Fast-Track Settlement, participation in FTS will not preclude PAM access, and PAM requests are subject to the same approval procedures.

Tax Treaties – Mutual Agreement Procedures

For double tax issues arising under tax treaties, the MAP may be available. In general, the competent authorities of the two taxing jurisdictions request information from the taxpayer and then negotiate a proposed resolution among themselves, which the taxpayer can either accept or reject.

Tax disputes may be settled through the various ADR mechanisms described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction, depending on the complexity and willingness of both parties to negotiate. IRS Appeals plays an important role in resolving disputes before they reach court. The traditional IRS Appeals process is often the most effective, because IRS Appeals has the authority to settle based on the hazards of litigation without the agreement of the Examination function. For issues that create double tax risk, utilising a tax treaty’s MAP is generally the most effective means of avoiding double taxation.

Any of the ADR tools described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction can help a taxpayer facilitate a settlement reducing the amount of proposed tax and related penalties. Outside of the MAP article under a treaty, the IRS will generally not address interest because it is statutorily mandated (and computational). In a MAP proceeding, most tax treaties permit the competent authorities to reach agreement on ancillary issues, such as the application of domestic law provisions, including those relating to interest.

Binding advance rulings can provide taxpayers with certainty regarding their tax positions and reduce the likelihood of disputes with the IRS. These mechanisms allow taxpayers to obtain official IRS guidance before filing their returns, particularly in cases involving complex transactions and uncertain tax positions.

Private Letter Rulings (PLRs)

A PLR is an official written statement from the IRS that interprets and applies tax law to a specific taxpayer’s set of facts as represented to the IRS (and not subject to audit for purposes of the ruling). A PLR is binding on the IRS with respect to the requesting taxpayer, provided that the facts and representations in the ruling request remain accurate. PLRs are highly effective in preventing future disputes because they provide binding guidance binding the IRS before the taxpayer takes a tax position. PLRs are not binding in other cases and cannot be cited as precedent in court. Obtaining a PLR can be costly and time-consuming, as it involves filing a formal request and paying a user fee.

Advance Pricing Agreements (APAs)

An APA is a binding agreement between a taxpayer and the IRS regarding cross-border transfer prices and issues for which transfer pricing principles may be relevant. APAs can prevent transfer pricing disputes by ensuring in advance that the taxpayer and the IRS agree on the pricing methodology for the covered transactions. APAs involve extensive negotiations and require significant time and documentation. They can be rolled back to cover periods under audit.

Pre-Filing Agreements (PFAs)

A PFA allows large taxpayers with well-developed facts to resolve tax issues (excluding transfer pricing generally) before filing their returns (a pre-filing examination). This programme provides certainty by allowing the taxpayer to work collaboratively with the IRS before a return is filed with respect to issues that would likely be subjected to a post-filing audit. A PFA results in a binding agreement between the taxpayer and the IRS regarding the proper tax treatment of a specific issue.

For most taxpayers, the traditional IRS Appeals process is the best option for reaching a binding resolution with the IRS in a civil tax dispute. IRS Appeals can hear all types of civil tax cases (including transfer pricing and other international issues), has subject matter experts (eg, economists) on staff, and can settle the issues based on the hazards of litigation. IRS Appeals typically hears large cases in teams of at least three, with an Appeals team case leader in charge and technical experts also on the Appeals team (eg, economists and other subject matter experts).

IRS Appeals does not have its own formal precedent based on prior resolutions (though it might rely on prior resolutions informally and without advising taxpayers). IRS Appeals will not take positions inconsistent with binding statutes, regulations or case law, and will base its decisions on whether to compromise on the litigating hazards, and to what extent, considering the law as it exists and as applied to the facts. IRS Appeals does not settle based on general notions of equity and fairness.

If the taxpayer and IRS Appeals cannot settle the case, the taxpayer will still have the right to litigate the unresolved issues in court.

The two principal ADR mechanisms for settling transfer pricing or similar cross-border valuation or pricing disputes are traditional IRS Appeals and the MAP under a tax treaty, which are discussed in detail in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction to 6.4 Avoiding Disputes by Means of Binding Advance Information and Ruling Requests and 8. Cross-Border Tax Disputes. The headline benefit of the MAP proceeding is that it secures double tax relief if agreement is reached.

To gain greater certainty with respect to transfer pricing issues, taxpayers can also seek to utilise pre-dispute mechanisms, such as applying for an APA or the International Compliance Assurance Programme (ICAP) – a voluntary programme for large multinationals and tax administrations to work together in a co-operative risk assessment and assurance process with respect to transfer pricing issues. Similarly, for non-transfer pricing issues, the Compliance Assurance Process (see 1.3 Avoidance of Tax Controversies) can reduce the risk of a contentious audit.

Criminal tax cases are less frequent than civil ones. Civil investigations can evolve into criminal investigations, depending on the circumstances surrounding the alleged underpayment of tax. For example, if the IRS uncovers evidence of deliberate concealment, false statements or fabricated transactions, the case may be referred to the IRS Criminal Investigation division for further review. Crimes such as tax evasion require the specific intent to violate the law (in the case of tax evasion, wilful actions intended to avoid taxation). If a taxpayer inadvertently claims an improper deduction or tax credit, civil penalties can apply.

The US tax code does not include a general anti-avoidance rule (GAAR) or specific anti-avoidance rule (SAAR), but there are various judicial (common law) doctrines and other anti-abuse provisions that can apply to perceived abuses. See 7.8 Rules Challenging Transactions and Operations in This Jurisdiction and 8.3 Challenges to International Transfer Pricing Adjustments for further discussion.

Civil tax cases focus on determining tax liability and related civil penalties, while criminal tax cases address intentional misconduct. If there is a criminal tax investigation, the civil tax proceeding is usually suspended until the criminal case is closed. In a criminal case, the amount of tax loss sets the baseline sentencing range. After the criminal case is concluded, the IRS will assess the tax loss and could potentially impose additional civil penalties, such as the civil fraud penalty.

An administrative tax case can evolve into a criminal tax case if evidence suggests intentional wrongdoing. For example, a taxpayer that repeatedly under-reports income and ignores audit requests may initially face civil penalties, but the case may be referred for criminal investigation if the IRS uncovers forged documents, hidden offshore accounts or other evidence of intentional wrongdoing. If the investigation results in charges, the matter is referred to the Department of Justice (DOJ) for prosecution. While most civil investigations do not lead to criminal investigation (let alone prosecution), taxpayers engaged in deliberate tax evasion face a greater risk of criminal charges.

After the case is referred to the IRS Criminal Investigation division (IRS-CI), IRS-CI will determine whether there is sufficient evidence to proceed to a full criminal investigation. If IRS-CI determines that a full investigation is warranted, the special agents assigned may execute search warrants, serve subpoenas and conduct interviews. If there is sufficient evidence of criminal intent, IRS-CI will refer the case to DOJ for prosecution. If DOJ reviews the case and agrees to prosecute, the case is referred to a grand jury for indictment, arraignment, trial and sentencing. Either party can appeal the judgment.

The same court does not hear the related civil case in the same proceeding. The Tax Court and Court of Federal Claims do not hear criminal cases. Federal district courts hear criminal and civil cases separately, so it is conceivable (though rare) that the same court that decides the civil tax case would decide the criminal tax case.

Co-operation by the defendant, including upfront payment of tax, interest and penalties, could help reduce any fine ultimately imposed if the defendant is convicted.

As discussed in 7.5 Possibility of Fine Reductions, if a taxpayer/criminal defendant pays the tax and related penalties and interest, that could result in a lower criminal fine after conviction. While payment does not prevent prosecution, it could also benefit the defendant during plea negotiations with DOJ and could impact the judge’s decision on sentencing.

Judgments of district courts in criminal cases are appealable to the relevant Circuit Court of Appeals covering that district. The Supreme Court can grant review of a case petitioned from the appeals court.

There is no general anti-abuse rule in the US. Transactions involving abusive tax shelters and fraudulent offshore structures have led to criminal cases. In theory, any case in which the government believes a taxpayer acted intentionally to evade tax, interfere with an IRS investigation or commit one of the other tax crimes can lead to criminal prosecution.

If an additional tax adjustment arises that creates potential double tax exposure, a US taxpayer can contest the adjustment in domestic litigation or through a MAP proceeding under a treaty. MAP is generally the more common route where double taxation is at issue.

If a taxpayer contests the adjustment through domestic litigation that results in a final judicial determination, the US competent authority will only seek correlative relief from a foreign competent authority. This obviously increases the risk of double taxation versus pursuing relief via the treaty mechanism upfront. If the two taxing authorities are unable to reach a satisfactory agreement in a traditional MAP proceeding, the taxpayer will generally have the right to litigate the issue domestically and potentially in the foreign jurisdiction.

The US has not adopted the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI), and EU-specific directives do not apply in the US. Changes to tax treaties require ratification by the US Senate. In recent years, there has been limited activity in the negotiation or ratification of new or amended US tax treaties.

The US does not have overarching general anti-avoidance rules or regimes, but certain statutory provisions (eg, Internal Revenue Code Section 269, permitting the IRS to disallow a tax benefit if the taxpayer’s principal purpose for acquiring control of a corporation was the evasion or avoidance of federal income tax), judicial doctrines (eg, economic substance doctrine) and anti-abuse regulations (eg, Treasury Regulation Section 1.701-2, subchapter K anti-abuse rule to limit perceived abuses of the partnership rules or form) can apply in cross-border and domestic-only settings alike.

The closest analogues to a GAAR or SAAR in the US are judicially created anti-abuse doctrines that look to substance over form. Those doctrines include the economic substance doctrine, which has subsequently been codified. The scope and application of that doctrine continue to be litigated, including in transfer pricing and other cross-border contexts.

In the US, taxpayers regularly challenge transfer pricing adjustments in domestic courts as well as through the MAPs provided under tax treaties. In some instances, litigation ensues because bilateral procedures have not yielded a satisfactory result or taxpayers were denied treaty assistance.

Unilateral and bilateral APAs are commonly used in the US to obtain certainty with respect to transfer prices. In 2025, the US Advance Pricing and Mutual Agreement Program (APMA) received 178 APA applications and executed 110 APAs. As of the end of 2025, there were 622 APA applications still pending before APMA.

The APA process typically proceeds as follows.

• First, the taxpayer submits the APA request to APMA, along with a user fee.
• APMA then notifies the taxpayer that the application was accepted or requests additional information.
• APMA generally then seeks an opening conference to discuss the request. In the case of a bilateral APA, APMA might invite the taxpayer to make a joint presentation to both competent authorities.
• APMA then assesses the APA and engages in discussions with its foreign counterpart in the case of a bilateral APA request.
• If the parties reach agreement, they proceed to executing an APA.
• Once an APA is executed, the IRS monitors compliance throughout the term based on APA Annual Reports filed by the taxpayer.
• If an APA is not reached, the taxpayer’s case is typically placed back into an examination, with the APA submissions of the parties sometimes giving the examination function a roadmap of potential issues to audit.

In the US, transfer pricing accounts for most of the litigation involving cross-border transactions. The IRS has increasingly focused on intercompany financing transactions, cost-sharing, and licences or assignments of intangible property (particularly in the technology and pharmaceutical sectors). Many of these disputes focus on the pricing of intangible property transactions. Where disputes turn on legal interpretation, legislative or regulatory changes or judicial determinations may be necessary to minimise further litigation. In other cases, expanded use of advance resolution mechanisms and treaty-based processes may be the best way to avoid litigation.

This is not applicable in the US.

This is not applicable in the US.

This is not applicable in the US.

This is not applicable in the US.

The USA is not a signatory of the MLI, but the 2016 US Model Income Tax Convention and a limited set of US tax treaties contain mandatory, baseball-style (final offer) arbitration provisions that a taxpayer can invoke by written request if the competent authorities fail to reach agreement within a certain period. To date, arbitration provisions are included in the US tax treaties with Belgium, Canada, Croatia (pending ratification), France, Germany, Japan, Spain and Switzerland. Other tax treaties (eg, the US–Mexico tax treaty) allow for voluntary arbitration if agreed to by the competent authorities.

Although the US has historically opposed mandatory arbitration, more recent IRS leadership has expressed support for its use as a final step in the competent authority process.

In the US, tax treaties with arbitration provisions do not limit arbitration to specific matters, but the competent authorities can jointly agree that a particular case is not suitable for determination by arbitration (eg, where a taxpayer initiates litigation on the issues subject to the competent authority proceeding).

The 2016 US Model Income Tax Convention and the eight US tax treaties that contain mandatory arbitration apply baseball-style (final offer) arbitration. Arbitration is intended as a mechanism of last resort when competent authority negotiations fail. The “winner takes all” structure is designed to incentivise the competent authorities to reach a negotiated resolution before the taxpayer invokes arbitration.

This is not applicable in the US.

This is not applicable in the US.

It is unlikely that the US will adopt the current iteration of the OECD Pillar One or Pillar Two initiatives anytime soon. As discussed in 1.4 Efforts to Combat Tax Avoidance, the OECD released a “side-by-side” package establishing a safe harbour exempting multinational groups with ultimate parent entities in qualifying jurisdictions (including the United States) from Pillar Two’s income inclusion and undertaxed profits rules.

In the US, judicial decisions are published, and, in general, all evidence and other filings in judicial proceedings are publicly available absent a protective order. In contrast, the ADR mechanisms discussed in preceding sections are confidential.

In the context of the bilateral or multilateral resolution of tax disputes, resolution is generally achieved through the MAPs under applicable US tax treaties. Only eight US tax treaties currently provide for mandatory arbitration; in practice, the goal is to reach a negotiated agreement without arbitration.

In resolving double tax disputes, taxpayers generally hire independent professionals (lawyers and other tax professionals) to assist throughout the process, which includes preparing submissions to competent authorities, engaging economic experts (if needed), preparing legal analyses, and meeting and working with the competent authorities. In competent authority proceedings, the IRS does not hire external professionals but utilises its own lawyers and economic experts.

There is no litigation at the administrative level in the US. There is an administrative appeals process initiated with a protest. There is no fee for filing a protest. There are, of course, expenses associated with hiring outside counsel and any other advisers.

Taxpayers will generally incur small filing fees and other court costs at the beginning of trial or appellate proceedings.

In the US, including in tax cases, the taxpayer and government generally pay their own attorneys’ fees. A taxpayer that is the prevailing party in litigation against the government can seek an award of attorneys’ fees, but various limitations restrict the types of taxpayers eligible for such relief, rendering the provision inapplicable in practically all large cases.

Either the taxpayer or the government can seek an award of certain costs (eg, transcripts and service of subpoenas) in a district court or Court of Federal Claims case in which they prevail.

A taxpayer that prevails in refund litigation is awarded the amount paid before litigation plus overpayment interest.

The IRS does not indemnify taxpayers where it makes improper assessments. There are procedures available to lower net worth taxpayers and smaller businesses that allow for the recovery of fees and costs under certain circumstances. Those procedures are rarely applicable in large cases.

There are no user or administrative fees for the ADR mechanisms described in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction, but there are fees:

• for new APA requests, the user fees are USD121,600; and
• for renewals, the fee is USD65,900.

For small case APAs (available if the controlled group has sales revenue of less than USD500 million in each of its most recent three back years and meets other criteria), the fee for new requests is USD57,500, and USD24,600 for amendments. In contrast to an APA, there is no fee to apply for or participate in the ICAP.

To the extent the taxpayer has the option to retain a third-party arbitrator or mediator (eg, in post-appeals mediation), the taxpayer covers that cost.

Almost all civil tax litigation is adjudicated in the Tax Court. In FY 2025, the Tax Court received 18,549 new cases, approximately 40% of which were small tax cases, which are handled under simpler, less formal procedures and cannot be appealed. Most Tax Court judges are assigned roughly 100 to 125 cases per calendar session and about seven to ten trial sessions annually. The Tax Court closed 20,961 cases in FY 2025.

A few hundred civil tax cases are filed against the US in the refund forums in a typical year. This includes cases filed in the district courts and the Court of Federal Claims.

There is no published data available.

There is no published data available.

Tax disputes with the IRS can be complex, time-consuming and expensive. To navigate these disputes effectively, the taxpayer should adopt a strategic approach that minimises risks, preserves rights and maximises the likelihood of a favourable outcome. Below are some key strategic guidelines to consider.

Fact Retention and Development

Taxpayers must be able to substantiate the positions on their tax returns or in their refund claims, and should retain supporting evidence in case of an audit or other tax controversy. Where litigation is reasonably anticipated, taxpayers are obligated to preserve potentially relevant information to avoid spoliation. Litigation holds are often necessary in this context.

Taxpayers should also consider further developing the factual record with the assistance of legal counsel to strengthen their positions.

Engage Experienced Tax Counsel Early

Because tax laws and procedures are technical and complex, a critical step in a tax dispute is engaging a qualified tax attorney or CPA with experience in tax controversy matters. Early guidance can help avoid mis-steps, preserve defences, and position the case for resolution on favourable terms.

Understand the IRS’s Position and Legal Framework

Taxpayers should carefully analyse the IRS’s argument and legal basis for the dispute before responding. Close review of examination reports and supporting analyses allows taxpayers to determine whether the IRS’s position is well-founded or vulnerable. That determination will shape how a taxpayer engages with the IRS to resolve the outstanding issues.

Utilise IRS Administrative Remedies

Many tax disputes can be resolved without litigation by using IRS administrative processes, particularly the IRS Appeals process. Taxpayers should also consider the availability and strategic use of ADR mechanisms to achieve efficient and cost-effective outcomes.

Potential Engagement of Expert Witnesses

In complex matters, particularly those involving valuation, transfer pricing or economic analysis, expert testimony can be critical. Early identification and development of expert analyses can help shape settlement discussions and litigation strategy.

Assess the Feasibility of Settlement Versus Litigation

Taxpayers should weigh the costs and risks of litigation against the possibility of settling with the IRS. The IRS may settle where litigation outcomes are uncertain. Conversely, the IRS often pursues litigation where its position is legally incorrect, the case involves a substantial tax liability, or the case has broader ramifications for other taxpayers.

Choose the Right Forum for Litigation

Forum selection can meaningfully affect the outcome of a dispute. The Tax Court allows taxpayers to dispute the tax without paying upfront, and offers judges specialised in tax law. In contrast, litigation in the district courts or Court of Federal Claims requires full payment, and offers judges with more general expertise.

Litigation

Initial court filings serve primarily to preserve claims and frame the issues, rather than to persuade the court on the merits. Although a petition (in Tax Court) or complaint (in a refund forum) is not evidence and may receive limited attention at the outset, a clear and coherent presentation of the issues can help structure the case and avoid unnecessary complications as the litigation progresses.

Appealing Adverse Rulings

When an adverse ruling is likely or has been issued, the taxpayer should assess the applicable standard of review and the strength of appellate arguments, and should consider engaging specialised appellate counsel.