United States

What You Need to Know About Alternative Dispute Resolution (video)

Sharon Katz-Pearlman is the national principal in charge of KPMG LLP’s Tax Dispute Resolution Services Network. She also serves as the global head, Tax Dispute Resolution & Controversy Network, a network of professionals from more than 90 KPMG International member firms who specialize in disputes representation.

With more than 25 years of experience, Sharon works with clients on all aspects of their IRS matters, dealing with a wide variety of domestic and international tax issues. 


Sharon Katz-Pearlman: There are several distinctions between domestic U.S. disputes and international tax disputes. The first one is pretty obvious. If you dialogue only with the Internal Revenue Service, you have a much more direct path. It's one revenue authority you're dealing with, and it will generally be a domestic issue. So maybe you're dealing with them on a worthless stock deduction or a bad debt issue or something that's just focused on U.S. tax implication.

It gets much more complicated when you're dealing with something cross-border, because now you have at least two revenue authorities that are potentially going to be looking at the same transaction, so you have to be much more mindful of responses in both or all jurisdictions in which you're responding, and you just have to be very aware of the fact that these days especially, information that you give in one part of the world is likely or potentially likely to end up in another part of the world with another revenue authority. There's a whole developing trend now around information sharing, and that makes these international disputes a bit more challenging for taxpayers.

Alternate dispute resolution is an emerging trend. It's been around, actually, for several years, but I think it's gathering speed, mostly because taxpayers want to avoid costly and lengthy litigation for a number of reasons -- not just cost, but also litigation is in the public record, and it's out there for everybody to know your business.

Alternate dispute resolution is still between a taxpayer and a revenue authority. In the U.S., they have really been pushing ADR, as it's called. A number of different opportunities to resolve cases without litigation, like a pre-filing agreement, which lets you go to the IRS before you file a return and take a position, and agree on the treatment that you're going to put on the return, so that when you're done with your negotiation, you have a closing agreement, you're finished, it's not audited again, that's it, you're done. So that's one great ADR tool.

There are also mediation-like tools, so there is a fast-track mediation settlement process that's available at the exam level, where you can take an issue and get it resolved before you go to appeals. There is appeals, which has been around for a long time in the U.S. But there is also a post-appeals process. So if you can't get something resolved in appeals, you can go to a post-appeals mediation. And then there's even post-appeals arbitration. So there are many different ways in the U.S. that you can get your case closed without having to worry about filing into either the tax court or the district court.

Around the world, there are also opportunities, but depending on which country you're in, they can be optimal or not so optimal, and there can be more, and there can be fewer, and there are some countries that don't have it at all. Australia is very, very big on ADR now, and we're seeing a real trend developing in that part of the world, again, because who wants to litigate if you don't have to? So a lot of -- a lot of focus there.

The UK also has a very healthy ADR program that's underway. There are some jurisdictions where they've tried it and it just hasn't worked. I think Canada is one of those where they've tried alternate dispute resolution, and it just never really took off. So it depends where you are in the world and where you're trying to resolve the case. You really have to get country -- country-specific.

There are a lot of benefits to using an alternate dispute resolution technique. The first benefit to the taxpayer is, it's generally much less expensive. There is nothing more costly than litigation in terms of time, resource and dollars, or whatever currency you're operating in.

So the reason it's so appealing is that it lets you avoid that, and it gets you a much more immediate result, which is what everybody wants now -- certainty, conclusion. You know, tax is not only a focus of a tax function anymore in a large multinational.  It's also focus of a board, it's the focus of an audit committee, it's the focus of a CFO. So everybody wants certainty. ADR gets you there quickly. Litigation can take five years.

There are also benefits to a revenue authority if a taxpayer asks for ADR, and that's the reason that so many governments have been coming out and offering it. It's the same thing. Governments are dealing with the same issues that taxpayers and companies are dealing with -- less resources, less budget and how to do more with less. And litigation for the government is also expensive and time-consuming and ties up their legal division and their attorneys for a really long time.

If there's a way for them to get done quicker, it's a better answer for them. They could potentially collect the money a lot sooner, and it helps them become more current in their inventory, because they're resolving issues as they develop more quickly, as opposed to litigation, where you could be getting the answer on an issue that occurred five years ago. So it lets them be much more in the moment and really close things down quickly and keep their own inventory moving forward.