International tax litigation in the U.S. usually happens when cross-border transactions conflict with U.S. tax laws, leading to disputes that may go to court. These cases often involve either a U.S. taxpayer doing business abroad or a foreign taxpayer operating in the U.S. The disputes often cover complex topics, including transfer pricing, the interpretation of tax treaties, and qualifying for foreign tax credits. Further, the disputes involve compliance with international reporting requirements, including the FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act).
The U.S. courts handle these cases, with judges balancing domestic tax laws and international agreements. This helps lower the risk of double taxation and resolves disagreements between the Internal Revenue Service (IRS) and taxpayers, whether U.S. or foreign.
Let’s first explore how an international tax dispute arises and when it reaches the U.S. courts.
An international tax dispute generally begins after an IRS audit or examination.
Generally, an IRS audit is an examination of an individual’s or organization’s books, accounts, and financial records. This is done to verify that the filed tax return is accurate and complies with U.S. tax laws.
If the IRS proposes adjustments and the taxpayer disagrees, the case could move to the IRS Independent Office of Appeals for settlement. If no agreement is reached in Appeals or if it is bypassed, the IRS may issue a Notice of Deficiency to the taxpayer. The taxpayer then has 90 days to file a petition in the U.S. Tax Court or pay the tax and sue in District Court or the Court of Federal Claims.
The initial path to resolve international tax disputes may be resolved through administrative resolution with the IRS. However, complex international cases frequently escalate to full litigation if they are not resolved administratively.
