The case is pending in the United States Tax Court, the agency said in a statement.
The agreement covers a transfer pricing dispute for the tax years 1989 through 2000. It also settles tax issues for the 2001-2005 period. The dispute involves intercompany transactions between Glaxo, which has its U.S. headquarters in Research Triangle Park, N.C., and Philadelphia, and certain of its foreign affiliates relating to various GSK pharmaceutical products.
Under the settlement, Glaxo will also abandon its claim seeking a refund of $1.8 billion in overpaid income taxes, the IRS said.
"We have consistently said that transfer pricing is one of the most significant challenges for us in the area of corporate tax administration," said Mark W. Everson, IRS commissioner. "The settlement of this case is an important development and sends a strong message of our resolve to continue to deal with this issue."
The IRS said transfer pricing was an accounting method requiring that related parties engage in transactions at arm's length to ensure the proper reporting of taxable income.
At issue, IRS said, was the level of U.S. profits reported by the Glaxo after making intercompany payments that took into account product intangibles developed by and trademarks owned by its British parent. Another factor was the value of Glaxo's marketing and other contributions in the United States.
GlaxoSmithKline Holdings is a subsidiary of British-based GlaxoSmithKline PLC.
Under the agreement, Glaxo conceded more than 60 percent of the total amount at issue for the years pending in Tax Court, the IRS said.
Glaxo, in a statement, said the net cash cost to GSK will be approximately $3.1 billion, covering federal, state and local taxes, interest and also the benefit of tax relief on the payments made.
It said Glaxo had previously made provision for the dispute and the settlement will not have a significant impact on the company's reported earnings or tax rate.
"GSK was confident of the strength of its position, but in view of the size of the potential financial exposure, as well as the continued level of resource being applied to the case, GSK concluded that it was in the best interests of its shareholders to reach this settlement, thereby removing the costs and uncertainty of future litigation," the company said.