The largest audit in the history of the IRS has finally taken its next step. On Oct. 11, Microsoft announced that the agency had notified the company that it owes $28.9 billion in back taxes, plus penalties and interest.
The audit is already well over a decade old and figures to grow older since Microsoft is allowed to appeal the IRS’ (Internal Revenue Service) conclusions and says it plans to. The audit is primarily focused on a deal the agency would later describe as “illusory in nature, serving no material economic purpose except to shift income.” In 2005, ProPublica wrote, that Microsoft “sold its most valuable possession, its intellectual property, to an 85-person factory it owned in a small Puerto Rican city.” Having struck a favorable tax deal with Puerto Rico, Microsoft then pushed its profits to the facility, which burned Windows and Office software onto CDs.
At the time, some Microsoft executives celebrated this “pure tax play,” and they had reason for optimism. Initially, the IRS did not take an aggressive tack. An early audit resulted in a much more modest change in 2011.
But earlier that same year, the IRS had set up a new unit to audit intra-company deals that sent U.S. profits to tax havens deals that were especially common among tech companies like Google, Facebook, and Apple. The leader of the new group decided that Microsoft’s deal in Puerto Rico was worth a much closer look. The IRS withdrew its initial finding and dug in to build a deep, comprehensive case.
By the time ProPublica published its story on the audit in 2020, the two sides had sued each other, and one case had long been stuck in court. Almost three years after the last motions in the case, a federal judge still had not ruled on whether the IRS should receive the documents it was seeking. Shortly after ProPublica asked the court for an update, the ruling finally came down.
“We believe we have always followed the IRS’ rules and paid the taxes we owe in the U.S. and around the world,” Senior Microsoft Executive Daniel Goff said, in a blog post on the company’s site that revealed the IRS’ determination.
The $29 billion that the IRS was seeking, he wrote, covered 2004 to 2013. He asserted, however, that the total, were the IRS to ultimately prevail, would be reduced by about $10 billion in taxes that Microsoft has already paid on its overseas profits. A major feature of President Donald Trump’s 2017 tax bill was a requirement that companies repatriate those profits, though they paid a special, low tax rate when they did. Microsoft had stored up $142 billion in offshore profits by 2017.
The Microsoft IRS audit highlights the significance of transparency and accountability in corporate taxation. Its outcome will impact Microsoft and the tech industry, emphasizing the need for regulatory scrutiny. As the case develops, it will be closely watched to ensure a fair assessment of taxes owed by such a major multinational corporation.
