Bankrupt crypto exchange FTX reached a tentative agreement with its largest creditor, the United States Internal Revenue Service (IRS).

According to a June 3 filing, the exchange and the IRS agreed to settle a $24-billion tax dispute. The IRS initially claimed FTX owed more than $44 billion in taxes, but the amount was later reduced. The settlement depends on the court’s approval of FTX’s reorganization plan.

Under the settlement, the IRS would agree to resolve its $24-billion claim, receiving $200 million in priority tax claim paid within 60 days of the plan’s approval. The tax authority will also collect $685 million as a subordinated claim, which gets paid after customers and other creditors.

The deal covers all tax claims until Oct. 31, 2022. According to FTX, the settlement reduces litigation risk and increases certainty regarding creditor and customer recovery. “The outcome of these proceedings would be uncertain given certain novel and complex issues of tax law raised by the IRS Claims.”

The filing shows that FTX doesn’t deny owing taxes but disagrees with the amount and specific reasons for the tax liability. Specifically, the exchange argues that it shouldn’t be taxed on funds misappropriated by its former CEO, Sam Bankman-Fried. It also disagrees with the IRS’ calculations for employment taxes related to salaries paid to Bankman-Fried and other executives.

Furthermore, the exchange argues it has valid deductions and losses the IRS is wrongly disallowing due to lack of proper documentation. However, the tax authority disagreed and was prepared to fight FTX in court for a significant tax payment:

“The IRS does not agree with the Debtors’ arguments and has informed the Debtors that absent a settlement it would pursue these and other theories to impose significant tax liability.” 

FTX proposed a new plan to repay creditors on May 8, aiming to fully reimburse all claims plus some additional compensation. Only creditors holding claims in an allowed amount below $50,000 will be eligible for a 118% recovery, which FTX anticipated was “98% of the creditors of FTX by number.” Repayments will be based on the value of assets at the time of FTX’s collapse in November 2022. 

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