JONES DAY PRESENTS®: Inside the IRS: What Drives Tax Disputes

Justin Campolieta:

Whether a tax dispute settles or goes to litigation, it depends largely on the taxpayer's approach to the government agency. Almost every tax dispute, large controversy can be resolved, but it requires an understanding of the dynamics, the decision making process behind the scenes at the IRS and what motivates them to either litigate or settle a case. And that's not always apparent to an outsider. What motivates a taxpayer oftentimes is the amount of tax. That's not the same calculus that the IRS uses. The IRS looks at issues, it looks at principles, and it would much rather litigate a case based upon a principle than it is about the amount of tax at issue. And so once you understand that, you can achieve a resolution because if you understand what's important to the government, you're much more likely to be able to speak their language and achieve a resolution.

Transfer pricing is a major issue that obviously a lot of our clients are focusing on. Transfer pricing is essentially any situation in which two controlled entities exchange value, typically outside of the United States. If a United States company transfers a piece of property for less than it's worth, then the income that they report is less than the IRS thinks that they should pay tax on. These cases that we deal with are multi-billions of dollars at stake. What's new is that there's different methodologies that the IRS is applying. There's different approaches to achieve what they think is appropriate tax result and they're constantly coming up with new positions and new arguments that taxpayers and large corporations are going to have to deal with. I was two decades with the IRS litigating large transfer pricing and other international controversies and you just tend to get an understanding of how it works over there.

Oftentimes, clients will be engaged in a year's long examination process with the IRS and they won't know along the way where the IRS is going, why it's going in a certain direction, and they won't get a lot of communication from the IRS. And so that's frustrating. And what I've found is it's helpful to have an advisor who's been there, who's done it, who's advised the IRS, who's litigated the cases to kind of serve as a translator. So the Jones Day Tax Controversy team, especially on the IRS side, is unparalleled. In terms of its experience with governments, we have three attorneys that have combined over 60 years of experience litigating cases on behalf of the IRS, virtually every single transfer pricing case in the United States in the past decade and that is valuable to clients.

And it provides useful and unique insights into how the government works, why they try cases, what motivates them, and how you can resolve them. It's a general partnership worldwide, which means that we all have to work together. We rise and fall together. And so what's important to Jones Day and to our tax team is that we get the right people, get the right result and truly provide a service to our client.