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: (1) from Internal Revenue Service (IRS) audits that result in determinations that taxpayers did not report and pay a sufficient amount of tax on their tax returns; or (2) where the IRS denies or fails to act on refund claims for taxpayers claiming they overpaid their tax through an amended tax return. Civil tax disputes are not limited to federal income tax. They can also arise with respect to employment, estate, gift and excise taxes.

Federal civil tax controversies 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 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 more than 150 million returns filed by individual taxpayers, which includes taxpayers generating income through pass-through business entities (eg, partnerships) and self-employment. In 2023, more than USD2.5 trillion was collected from individual income taxes, composing nearly 55% of all federal tax revenue.

Approximately 12 million corporate (2.4 million C corporation and 5.5 million S corporation returns) and partnership tax returns (5 million) are filed each year. Tax collections from the 2.4 million C corporations was USD455 billion in 2023, composing nearly 10% 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, if not larger than, that from C corporations.

For businesses and individuals operating as sole proprietorships or through pass-through entities, the IRS has dedicated groups, such as the Large Business & International and the Small Business/Self-Employed divisions, that 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 – where the IRS scrutinises intercompany transactions and compliance with complex international tax rules – such as R&D credits, the characterisation of income as capital or ordinary, and the timing and amount of income and deductions. For high-net-income and high-net-worth individuals and businesses operating through partnerships, the IRS has been aggressively pursuing areas of perceived abuse, including partnership income allocations, basis adjustments, the ability of partners to include deductions or losses, and other income deferral strategies. Recent IRS deficiencies relating to transfer pricing and large partnership income adjustments regularly reach more than USD100 million in tax liability.

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 subject to abuse and seeking advance rulings (eg, private letter rulings or advance pricing agreements) from the IRS for its opinion on the tax treatment of their transactions. For large corporations, the Compliance Assurance Process (CAP) may be an option for reducing controversy relating to their complicated tax reporting. Under the CAP, large corporate taxpayers and the IRS can resolve issues before tax returns are filed, but even CAP taxpayers and the IRS may disagree, which will then result in controversy.

Taxpayers can take more active steps to reduce their exposure from tax controversies through meticulous record-keeping, 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 last decade, governments across the world have focused increasingly on combating 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 in many ways discouraged the shifting of profits to lower-tax jurisdictions (eg, the Base Erosion and Anti-Abuse Tax, the Global Intangible Low-Taxed Income, and Foreign Derived Intangible 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.

The substantial statutory changes under the TCJA have resulted in substantial tax controversy with respect to the application of new laws 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 they have perhaps indirectly affected US tax controversies. In the US, the BEPS action items relating to transfer pricing have dovetailed with increased IRS enforcement and scrutiny on transfer pricing and have contributed to more transfer-pricing audits and litigation in the US. Importantly, the US has not implemented the OECD’s Pillar 1 or Pillar 2 initiatives. Given the current administration’s stance on those OECD initiatives, the US is unlikely to change its laws to implement OECD prerogatives in the near term. But any implementation of these rules by other countries and their application to US-based companies could trigger more US controversy as taxpayers seek to avoid double taxation and potential punitive measures.

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, then 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, then 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, then 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 them. 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 have a greater 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-net-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 (www.irs.gov/businesses/corporations/lbi-active-campaigns), 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 greater potential for under-reported income.
• Cryptocurrency users: The IRS has increased enforcement on cryptocurrency transactions, ensuring taxpayers report digital asset sales, trading and mining income correctly. 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 their income, such as home office deductions, charitable contributions or business expenses, may be flagged for an audit.

Targeted Industries and Issues

The IRS periodically focuses on specific industries and their issues based on compliance trends. Industries and the issues relevant to them 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.
• Professional services firms operating as partnerships: Self-employment taxes, partnership income allocations and basis adjustments.

The IRS must initiate an audit within a specific timeframe – generally within three years from the date a tax return is filed because, in the absence of an exception, the IRS 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 do not commence until well 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 permit the IRS sufficient time to audit the return, then the IRS will issue a notice of deficiency. This has the effect of suspending the limitations period on assessment while the taxpayer can petition the Tax Court (and in the event the taxpayer does and a Tax Court proceeding ensues).

There are also various exceptions to the three-year limitations period on assessment. For example, if a taxpayer is found to have under-reported gross income by more than 25%, the three-year assessment statute can be 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, then the statute of limitations does not start until the relevant return or forms are filed. 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 relates to partnership adjustments instead of assessments of tax, which occur at the partner level.

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 in order to pursue an administrative appeal. This is because IRS Appeals typically requires at least one year remaining to assess tax when a case is transferred to it.

The location of a tax audit depends on the type of audit being conducted and the complexity of the taxpayer’s return. A correspondence audit is conducted entirely through the mail, whereby taxpayers submit documents for specific tax-return items. A field audit can occur either at an IRS office that has requested the taxpayer to appear and answer questions or provide documentation or at the taxpayer’s business or home (where the IRS can review records and interview the taxpayer). The IRS requests printed documents and electronic records. The latter are becoming increasingly prevalent as taxpayers’ records shift away from paper. It is already common in large audits for all records to be provided electronically.

IRS audits, particularly in large transfer-pricing and other complex cases, can also involve witness interviews (transcribed or not transcribed) and facilities tours.

The IRS issues substantial guidance regarding enforcement priorities and initiatives, in which the IRS identifies various legal issues and transactions of interest. Of particular interest are the IRS Large Business & International compliance campaigns, which identify numerous tax issues the IRS believes pose compliance issues. There are currently a few dozen active campaigns.

In our experience, key audit issues include (1) international reporting requirements, (2) transfer pricing, (3) foreign tax credits, (4) research credits, (5) partnership-related income allocations and basis adjustments, and (6) cryptocurrency transactions. The IRS regularly issues guidance (usually sub-regulatory) relating to these issues and has focused substantial resources on 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 11 TIEAs. Key jurisdictions with which the US does not have a tax treaty are Argentina, Brazil, Hong Kong and Singapore, but TIEAs exist with Argentina, Hong Kong and Singapore.

It is often not known whether the IRS has requested information under an exchange of information agreement before or during an audit. Based on public reporting, the IRS has regularly requested 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 is unable to provide requested information.

Joint tax audits in the US are relatively rare, 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 adjustments, penalties and further enforcement actions. Key strategic considerations include:

• Engaging experienced tax professionals: Taxpayers should consider retaining a tax attorney early in the audit process to ensure that taxpayers’ rights are protected and responses to audit enquiries are handled 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 should retain other evidence demonstrating the exercise of ordinary business care with respect to those positions. This is critical to substantiating those positions and avoiding accuracy-related penalties.
• Co-operating without over-disclosing information: Taxpayers should be transparent with the IRS without over-disclosing information. Taxpayers should provide only the information requested by the IRS to avoid expanding the scope of the audit. Furthermore, taxpayers should take great care not to inadvertently disclose privileged materials or other confidential or sensitive materials that may require greater levels of protection or are subject to rules that limit or prohibit disclosure.
• Negotiating a settlement through the IRS auditor/examiner or IRS Appeals: Resolving and settling disputes at the administrative level is valuable because it can save time and money while providing certainty. 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. With respect to disputed issues, taxpayers should protest their cases to IRS Appeals.

After the conclusion of an audit, the IRS examiner will either accept the return as filed (no changes needed, no tax assessment) or propose adjustments to the taxpayer’s return. If the taxpayer does not agree with the proposed adjustments, then the examiner will send a final examination report and a 30-day letter. The 30-day letter affords the taxpayer 30 days to file a protest to initiate an administrative appeal. This 30-day period is frequently extended for a month or two with the examiner’s consent. In rare instances, the IRS may not permit a taxpayer the right to protest the issue to IRS Appeals, either by not providing a 30-day letter or by designating the case for litigation.

An IRS Appeals team will review the case in a way that is impartial and fair to both the taxpayer and the examination team, taking into account the hazards of litigation. The taxpayer and the examiner 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, then the IRS will send the taxpayer a notice of deficiency, which gives the taxpayer the right to file a petition for redetermination contesting the adjustments 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, then the taxpayer must pay the amount of tax shown as 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 examiner 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. Thus, as noted in 2.2 Initiation and Duration of a Tax Audit, the IRS will require 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 receipt of the case from the examiner. Complex cases, however, often take longer (sometimes up to three years) to resolve.

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 the assistance from the Taxpayer Advocate Service to help facilitate a solution.

If a taxpayer files a claim for refund by submitting an amended return (either prior to or in connection with an IRS audit), the IRS will generally respond 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 have to 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 (ie, before payment) in the Tax Court or by paying the tax and ultimately suing for a refund in the appropriate District Court or the Court of Federal Claims. 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, then the taxpayer must fully pay the disputed tax, 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 a criminal tax litigation by filing criminal charges.

Regardless of the forum (prepayment in the Tax Court or refund litigation in the District Court or the Court of Federal Claims), 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 IRS’s determination reflected in the notice of deficiency and the factual and legal bases supporting the taxpayer’s position. In federal District Court or the Court of Federal Claims, the process starts with a complaint. The IRS Chief Counsel in the Tax Court or the Department of Justice Tax Division in the District Court and the Court of Federal Claims 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, both 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 down 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 trial, the parties present their facts and arguments before a judge. Tax Court and US 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. IRS attorneys represent the government in the Tax Court. Department of Justice lawyers represent the government in all refund litigation and judicial appeals.

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

If the taxpayer or government disagree 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 and defending against IRS determinations. 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 both 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 in tax litigation. Both parties can call witnesses and can cross-examine the other party’s witnesses. The judge decides on 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 to prove that its position is correct by a preponderance of the evidence. In certain cases, such as those involving transfer pricing, the taxpayer has a heightened burden of proof – that the IRS’s adjustment is arbitrary, capricious or unreasonable and that the taxpayer’s position is the right one.

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.

1. Evidence Needed to Win and Privilege Considerations

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

2. 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.

3. Whether or Not to Pay Before Litigation

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

4. 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 in order 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. 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 take into account non-binding decisions from other courts when making their rulings, those rulings 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 that decided the case is located. All appeals from the Court of Federal Claims are to the Court of Appeals for the Federal Circuit. Within those Circuit Courts, the taxpayer or the government can request rehearing by the full court (en banc) of a prior decision by the initial Circuit Court panel of three judges. 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, then 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.

Either party may request a rehearing by the panel or en banc, and either party can petition the Supreme Court for review within 90 days of the appeals court’s entry of judgment.

Appeals of trial court decisions are decided by panels of three appellate-court judges with life tenure. These judges 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 judges (six); the Ninth Circuit currently has the most judges (29).

The Supreme Court is composed of nine justices with life tenure. The justices 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 alternative dispute resolution (ADR) mechanisms to resolve tax disputes efficiently without litigation. These methods aim to reduce time, cost and complexity while allowing taxpayers to negotiate settlements or clarify tax positions with the IRS. 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.

1. Fast-Track Settlement (FTS)

FTS is a voluntary process designed to resolve certain tax disputes efficiently before the traditional appeals process. The case is sent to FTS before a 30-day letter is issued and remains before the examination function while trained appeals mediators try to facilitate a mutually agreed resolution. For large taxpayers, IRS Appeals tries to resolve cases within 120 days. For small businesses, 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.

2. 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.

3. Traditional IRS Appeals Process

IRS Appeals provides an independent administrative review of tax disputes before litigation. 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 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.

4. Rapid Appeals Process (RAP)

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

5. Post-Appeals Mediation

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.

6. 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. In our experience, the traditional IRS Appeals process is 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 under a treaty, the IRS will 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 ruling requests play a significant role in providing taxpayers with certainty regarding their tax positions and reducing 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.

1. 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. 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 give the taxpayer clear IRS guidance before taking a tax position. PLRs are not binding on other taxpayers and cannot be cited as precedent in court. Additionally, obtaining a PLR can be costly and time-consuming, as it involves filing a formal request and paying a user fee.

2. 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 prevent transfer-pricing disputes by ensuring that the taxpayer and the IRS agree on the pricing methodology for related-party transactions during the APA’s term. APAs involve extensive negotiations and require significant time and documentation. They can be rolled back to cover periods under audit.

3. Pre-Filing Agreements (PFAs)

A PFA allows large taxpayers to resolve tax issues (excluding transfer pricing) 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.

As noted, for most taxpayers, the traditional IRS Appeals process is the best option for reaching a binding resolution with the IRS for civil tax issues, including those involving deficiencies or refunds. 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 (eg, economists and other subject-matter experts) also on the Appeals team.

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 and to what extent to compromise on the litigating hazards 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, then the taxpayer will still have the right to litigate the 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 through a MAP proceeding 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 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, discussed in 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 lead to 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 if the IRS uncovers forged documents, hidden offshore accounts or other evidence of intentional wrongdoing, the case may be referred for criminal investigation. If the investigation results in charges, then the matter is referred to the Department of Justice (DOJ) for prosecution. While the vast majority of 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), the 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 the DOJ for prosecution. If the DOJ reviews the case and agrees to prosecute, then 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 by the judge 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, then 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 the 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, then a US taxpayer can contest the adjustment in domestic litigation or through a MAP proceeding under a treaty. The latter is more common. If a taxpayer contests the adjustment through domestic litigation that results in a final judicial determination, then 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 generally will 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 (“Multilateral Instrument”, MLI), and any EU-specific directives do not apply to the US. Changes to tax treaties must be ratified by the US Senate. In the last decade, there have not been many new or amended tax treaties ratified.

The US does not have overarching general anti-avoidance rules or regimes, but there are 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, Treas. Reg. § 1.701-2, subchapter K anti-abuse rule to limit perceived abuses of the partnership rules or form) that can apply in cross-border and domestic-only settings alike. The closest general or specific anti-avoidance analogues in the US are a variety of judicially created anti-abuse doctrines that look to substance over form. Those doctrines include the economic substance doctrine, which has subsequently been codified. There have been a variety of recent court challenges to the extent to which the economic-substance doctrine may apply, including with respect to transfer pricing and other cross-border transactions.

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 2024, the US Advance Pricing and Mutual Agreement Program (APMA) received 169 APA applications and executed 142 APAs. As of the end of 2024, there were 560 APA applications still pending before APMA.

Once a taxpayer decides to request an APA, the process typically proceeds as follows. First, the taxpayer submits the request to APMA together with a user fee. APMA will then notify the taxpayer that the application was accepted or make a request for additional information. APMA will generally then seek 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 will then assess the APA and engage in discussions with its foreign counterpart in the case of a bilateral APA request. If the parties reach agreement, then they proceed to executing an APA. Once an APA is executed, the IRS will monitor compliance throughout the term. If an APA is not reached, then the taxpayer’s case will typically be placed back into an examination.

In the US, transfer pricing generates most of the litigation relating to cross-border transactions. Recently, the IRS has been focused on intercompany financing transactions, cost-sharing, and licences or assignments of intangible property (particularly in the technology and pharmaceutical spaces). The primary challenges arise with respect to intangible property. For issues involving disputes of law, legislative or regulatory changes or judicial determinations may be necessary to minimise further litigation. Otherwise, continued facilitation of advance resolution and treaty access to resolve these disputes may be the best way to mitigate litigation.

This is not applicable in the USA.

This is not applicable in the USA.

This is not applicable in the USA.

This is not applicable in the USA.

The USA is not a signatory of the Multilateral Instrument, but the 2016 US Model Income Tax Convention and a limited set of US tax treaties do contain mandatory, baseball-style arbitration provisions. To date, arbitration is included in the US tax treaties with Belgium, Canada, Croatia, France, Germany, Japan, Spain and Switzerland. Other tax treaties (eg, the US-Mexico tax treaty) include voluntary arbitration provisions, subject to agreement by the competent authorities to agree to arbitration.

Historically, the USA has opposed mandatory arbitration, but more recent views of the IRS leadership have been supportive of mandatory arbitration 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, if a taxpayer dockets a court case on the issues subject to the competent authority proceeding, arbitration is not suitable).

The 2016 US Model Income Tax Convention and the eight US tax treaties that contain mandatory arbitration apply baseball-style arbitration. Arbitration is the last option when negotiations between two positions break down, and having “winner takes all” mandatory arbitration can be an effective tool to incentivise the competent authorities to reach a less extreme resolution before arbitration.

This is not applicable in the US.

This is not applicable in the US.

It is unlikely that the USA will adopt the current iteration of the OECD Pillar 1 or Pillar 2 initiatives in the near future. In the absence of changes in these rules to accommodate the current US international tax rules, such as Global Intangible Low-Taxed Income rules and changes in policy goals from the congressional and executive branches, expansive multilateral tax and economic arrangements are unlikely.

In the US, judicial decisions are published, and, in general, all evidence and other filings made in a judicial proceeding are publicly available in the absence of a protective order to keep certain information confidential. The ADR mechanisms discussed previously are kept strictly confidential.

In the context of bilateral or multilateral resolution of tax disputes, the only options with respect to US tax liabilities are under the MAPs reflected in existing US tax treaties. Only eight US tax treaties currently provide for mandatory arbitration, and, even then, 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 them with the entire process from start to finish, which includes preparing requests to competent authorities, engaging economic experts (if needed), preparing legal analyses, meeting and working with the competent authorities, and advising taxpayers throughout. In competent authority procedures, 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 USA. As noted above, there is an administrative appeals process. There is no fee for filing a protest. There are, of course, expenses associated with hiring outside counsel and any other advisers.

Taxpayers generally will 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 the IRS 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. There are fees, however: for new APA requests, the user fees are USD121,600; 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 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 2023, the Tax Court received 22,211 new cases, approximately one-third or more of the cases 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. Additionally, the Tax Court closed 37,000 cases in FY 2023. The total value of all cases received in FY 2023 (tax and penalty, excluding interest) was approximately USD8.5 billion.

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 financially significant. 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 that a taxpayer should consider.

1. Fact Retention and Development

As noted earlier, taxpayers must substantiate the positions on their tax returns or in their claims for refund. It is critical taxpayers retain such evidence in case of an audit or other tax controversy. Furthermore, if taxpayers are concerned about tax controversy and litigation, taxpayers have further duties to retain potentially relevant information to avoid spoliation. Thus, litigation holds are often necessary in the context of a tax controversy.

Furthermore, taxpayers may want to bolster their positions with additional fact development with the assistance of legal counsel.

2. Engage Experienced Tax Counsel Early

One of the most critical steps in a tax dispute is engaging a qualified tax attorney or CPA with experience in tax litigation and controversy matters. Tax laws are highly technical, and IRS procedures can be complex. Having a professional advocate ensures that the taxpayer’s rights are protected and that the dispute is handled strategically.

3. Understand the IRS’s Position and Legal Framework

Taxpayers should analyse the IRS’s argument and legal basis for the dispute before responding. Reviewing the IRS notices and reports to understand the tax adjustments, penalties, and legal basis cited by the IRS will help taxpayers determine whether the IRS’s interpretation of the law is reasonable or overly aggressive. That determination will shape how a taxpayer engages with the IRS to resolve the outstanding issues.

4. Utilise IRS Administrative Remedies

Many tax disputes can be resolved without litigation by using IRS administrative processes. After determining whether the IRS’s position is reasonable or overly aggressive, evaluate whether this issue could be resolved through ADR.

5. Potential Engagement of Expert Witnesses

Depending on the underlying issues and the stage of the controversy, early identification and engagement of potential expert witnesses can provide a substantial benefit to taxpayers in terms of case development and settlement.

6. 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 if there is uncertainty about prevailing in court. Litigation is often pursued when the IRS’s position is legally incorrect or lacks merit, the case involves a substantial tax liability, or if a taxpayer wishes to challenge a tax law interpretation that affects its future filings.

7. Choose the Right Forum for Litigation

If litigation becomes necessary, the taxpayer should carefully choose the most favourable court. The Tax Court is best for cases where the taxpayer wishes to dispute the tax without paying upfront. The Tax Court judges are specialised in tax law, potentially increasing the likelihood of a systematic and technical analysis of the law. The District Court or Court of Federal Claims requires the taxpayers to pay the disputed tax first and then sue for a refund. These forums could be best for larger corporate tax disputes involving complex federal tax law issues as the judges will potentially take a more holistic approach.

8. Litigation

For all documents filed with any court, taxpayers should always take the opportunity to put forth a persuasive argument. Although a Tax Court petition or complaint filed in the District Court or Court of Federal Claims is not evidence, it is the judge’s first introduction to the case. A more detailed and robust petition will be more persuasive to a judge. Further, going through the detailed analysis on the outset of litigation will allow taxpayers to understand the strengths of their arguments along with any gaping issues.

9. Appealing Adverse Rulings

If a taxpayer is concerned about or receives an adverse ruling, the taxpayer should weigh the pros and cons of filing an appeal and consider engaging specialised appellate counsel.