Microsoft in Legal Battle over IRS Audit

Software company Microsoft disclosed that the IRS has reopened its tax audit for the years 2004 through 2006, in addition to its ongoing audit of the tax years from 2007 through 2014. The audit is concentrated on transactions between Microsoft and its affiliates that are based in Puerto Rico and the Bermuda.

Due to the magnitude of the examination, the IRS has engaged the services of an external law firm to assist in the audit. But the software company has filed a federal lawsuit against the IRS, asking the court to enforce its public records request for the IRS to show documents on the agency’s decision to hire the external law firm.

Also under fire is the tax agency’s recent amendment of its rules which now allow non-government personnel to question witnesses under oath.

Reason Behind IRS Audit

The IRS examination involves a practice known as ‘transfer pricing’ which may be abused through a process of shifting profits to low-tax or no-tax countries, to avoid paying the US corporate income tax rate of 35 percent. IRS maintains that the Microsoft audit is one of the largest cases on alleged abusive transfer pricing, possibly involving ‘tens of billions of dollars’ in corporate income.

According to Microsoft securities filings, the software company has significantly increased its offshore holdings which allowed it to keep its profits abroad, exempting them from US taxes in the meantime. They further declared that if the offshore profits were repatriated, Microsoft would owe the US government around $29.6 billion in taxes. This amount suggested to tax examiners that Microsoft had paid less than 10% on its income from foreign sources, opening Microsoft to IRS audit.

Microsoft Questions Decision to Hire Outside Counsel

Hiring non government lawyers to examine taxpayer records can violate taxpayer’s rights and disrupt the regulated relationship between government tax examiners and taxpayers. The latest Microsoft lawsuit is one of the legal remedies available to it in order to protect the company from an irregular audit.

Undergoing an IRS tax audit can be a stressful and challenging time that can affect regular business operations. Tax examinations are governed by complex rules and regulations that an experienced tax attorney knows.

If you have received an IRS notice, it’s absolutely important for you to contact an IRS tax lawyer immediately.

In Tyler and the East Texas area, tax attorney Scott Scammahorn has almost 2 decades of tax litigation experience, helping clients fight the IRS on a variety of matters. We handle all aspects of tax resolution such as IRS problems, IRS tax liens and levies, Offers in Compromise, payment plans, and innocent spouse relief.

We welcome your call today at (903) 595-1000 to speak to an attorney about your tax problem.