Western Union Challenges IRS Rule on Foreign Income: A Case to Watch for International Tax Advisors

Western Union, the global money transfer giant, has filed a legal challenge against the IRS, arguing that the agency improperly inflated its U.S. taxable income by more than $8.2 million. The case, filed July 18, 2025 and reported today by Law360, raises major questions about income sourcing rules, foreign service income, and the boundaries of U.S. jurisdiction under the Internal Revenue Code.

For multinational businesses and their tax advisors, this case could set a precedent on how foreign-earned revenue is attributed to U.S. returns—and whether the IRS is stretching its authority beyond the statutory framework.

The Heart of the Dispute

Western Union’s position centers on IRC Section 861, which governs income sourcing and allocation for international operations.

The IRS’s claim:

• The agency included $8.2 million in foreign service income in Western Union’s U.S. tax base, citing a regulation that the company argues is inconsistent with the statute.

Western Union’s response:

• The company alleges the IRS applied a "flawed and overly expansive interpretation" of existing rules.

• Its legal team asserts the income in question was earned by foreign affiliates under arm’s-length service arrangements, not attributable to U.S. operations.

• The lawsuit seeks to exclude the income from U.S. taxable income and invalidate the regulatory basis used by the IRS.

  
  

Why This Matters for Tax Professionals

1. Precedent for International Service Income

If Western Union prevails, the ruling may limit the IRS's ability to pull foreign-source service revenue into the U.S. tax base—a big win for multinationals that operate on a global services model.

2. Section 861 Under the Microscope

This case puts a spotlight on how IRS regulations interact with the plain language of the statute. Many international tax positions hinge on nuanced interpretations of sourcing rules. A court ruling here could force regulatory changes or reinforce taxpayer protections.

3. Transfer Pricing & Intercompany Contracts

The dispute reinforces the importance of documenting intercompany arrangements and clearly delineating income attribution between foreign and domestic affiliates. Even companies with compliant transfer pricing policies may be exposed if the IRS takes a broader view of service income aggregation.

Key Takeaways for Multinationals

• Review service agreements: Tax teams should revisit intercompany service contracts to ensure alignment with IRC sourcing rules.

• Monitor litigation closely: This case could influence IRS exam strategy, especially in service-heavy industries.

• Plan conservatively: Until resolution, taxpayers should be prepared for IRS scrutiny of foreign-sourced services with U.S. touchpoints.

  
  

What’s Next?

The case will proceed in federal district court, with early motions likely to address whether the IRS regulation at issue can withstand a Chevron deference challenge—or whether it conflicts with clear statutory limits.

Expect the tax community, especially international compliance advisors, to watch this closely. A win for Western Union could narrow IRS authority, while a loss could embolden broader income aggregation in cross-border cases.

Bizora’s AI engine monitors IRS litigation and regulatory updates daily. Our international tax module helps CPA firms assess sourcing risk, detect exposure under Section 861, and model inclusion scenarios.