Where arbitration actually shows up
In disputes with the IRS, the familiar path runs through examination, the Independent Office of Appeals, and the courts, and binding arbitration is not a standard part of that process. Appeals has offered mediation and other alternative dispute resolution options in limited situations, and whether one is available should be confirmed for the particular case. In cross-border matters, when two countries tax the same income, their competent authorities may try to resolve the conflict through a mutual agreement procedure. Some tax treaties provide for arbitration if the authorities cannot agree. Those proceedings are run by governments, and the taxpayer's role depends on the treaty and the procedure involved.
Private disputes about tax
Arbitration is far more common between private parties. Purchase agreements often contain tax indemnities, rules for allocating the purchase price, and provisions sending disagreements over closing adjustments to an independent accountant or arbitrator. Partnership and operating agreements may route disputes over tax distributions or allocations to arbitration as well. In those settings the arbitrator decides what the contract requires between the parties, and the decision does not bind the IRS or a state tax department. Keep the full agreement, the returns and workpapers at issue, and the correspondence showing how each side understood the provision.
Before you agree, or once a dispute begins
If you are negotiating a deal, we look at whether an arbitration or accountant-determination clause is clear about its scope and about what happens if a tax authority later takes a different view. If a dispute has already started, we review the clause, the deadlines it sets, and whether the issue falls within it at all. We also ask whether a parallel audit is underway, because positions taken in an arbitration can surface in a tax examination, and the reverse. That review tells us whether arbitration is the right forum or whether another route fits the problem better.
