The companies still need to agree on a price. The sides have discussed 11 Pfizer shares per Allergan share, which would come to about $354 per share, or a 13 percent premium to Allergan's closing price Friday, sources said.
New Treasury Department rules designed to limit the benefits of overseas corporate tax inversions would likely not deter the deal. Shareholders of Ireland-based Allergan would own more than 40 percent of the combined company.
The breakup fee, another point of negotiation, would likely be in the area of the 2 to 3 percent that Reuters reported Friday, sources said.
Allergan CEO Brent Saunders could become a successor to Pfizer CEO Ian Read under the deal.
Pfizer declined to comment. Allergan did not immediately respond to a request for comment.
— Reporting by CNBC's Meg Tirrell