Microsoft Ordered to Turn Over Records of IRS Audit

The IRS took on Microsoft eight years ago for tax evasion, as the tax agency discovered that the multinational giant was avoiding paying billions in taxes in the U.S. by moving its profits to its Puerto Rico subsidiary. The IRS challenged them in court while Microsoft aggressively pursued their stance that they did nothing wrong.

According to ProPublica, Microsoft had shifted at least $39 billion of the profits made in the U.S. to Puerto Rico where the company had made “arrangements” to pay nearly zero tax. Microsoft defended its move by saying that the money transferred was from the sale of their intellectual property in the U.S. to a factory in Puerto Rico. However, the IRS came up with evidence that shows that it was indeed a tax evasion scheme.

Microsoft is now finding its feet in quicksand after the judge told the company to turn over important company documents. The Hill shares the details:

“A federal judge in Washington state declared that Microsoft must turn over key documents within the next seven days, a shot in the arm for an expansive IRS audit that has dragged on for more than 12 years. The IRS has been investigating whether Microsoft shifted intellectual property worth billions of dollars to Puerto Rico in violation of U.S. tax law.

‘The government believes that Microsoft’s cost sharing arrangements … impermissibly shifted revenue out of the United States, both decreasing Microsoft’s federal income tax liabilities and obtaining more favorable foreign tax treatment,’ the filing on Friday reads.

Microsoft had sought to conceal the relevant documents in the case, arguing they should remain confidential. But U.S. District Judge Ricardo Martinez declared almost none of the more than 100 documents are protected.

The IRS is investigating whether Microsoft shifted $39 billion in U.S. profits to Puerto Rico in order to receive a nearly zero percent tax rate. The agency has found that Microsoft moved billions of dollars in profits to avoid taxes, according to the investigation by ProPublica and Fortune.

‘This was a pure tax play and because we took the factory live by July 1 we were able to start claiming the tax benefit as planned,’ one Microsoft executive wrote, according to the article.

Martinez reportedly made the decision to reawaken the case shortly after ProPublica contacted him for its investigation.

‘On Jan. 17, 2020, after this story was finalized for publication, but before it published, U.S. District Court Judge Ricardo Martinez issued his ruling on the remaining, disputed documents,’ reads an editor’s note within the ProPublcia article. ‘It was another big win for the IRS in the case. (Martinez, who had taken the better part of three years to consider the ruling, issued it 10 days after ProPublica inquired about the delay.)’

Microsoft in a statement said the ruling is not about Microsoft’s historical tax arrangements.

‘The Judge acknowledged that this procedural ruling about document production is based on limited information, and is not a ruling on the validity of Microsoft’s historical tax arrangements,’ the company said.”