Microsoft is being audited by the IRS and they demand leaders testify
The IRS is suing a number of former and current executives of Microsoft in a bid to force them to testify in an investigation into the company’s corporate tax practices.
According to The Seattle Times, at issue is whether the company is following corporate tax law in its practices of transferring the rights to its software to various subsidiaries in countries and territories of the U.S. with low taxes. This practice is commonly used by multinational corporations with valuable intellectual properties, and reportedly had “billions of dollars of impact” on Microsoft’s taxable income between 2004 and 2006, according to the lawsuit being brought by the IRS.
How it works
Companies that have subsidiaries in countries around the world are supposed to operate as though those subsidiaries were an “arm’s length” away for tax purposes. This means negotiating and dealing fairly with each other instead of setting prices that are favorable to the company come tax time. Frequently, this is not what happen.
Picture a large, multinational company with Subsidiary A in a country or locale with low taxes but a small market for its intellectual goods. Subsidiary B is in a country with higher taxes but a much larger market. Subsidiary B makes $1 billion in profits, but to reduce the overall tax burden, the company shifts the rights to the intellectual goods to Subsidiary A and sets the “price” for Subsidiary B to sell those goods at $1 billion. The result is that Subsidiary B makes no profits on paper, meaning that it has to pay virtually nothing in corporate tax. Subsidiary A has $1 billion in profits and pays the lower taxes on those profits that are mandated by its location.
The Internal Revenue Service appears to believe that this is what is happening in the case of Microsoft, and is attempting to get to the bottom of the issue.
According to GeekWire, the IRS issued a summons to longtime CEO Steve Ballmer at his home in Seattle demanding that he testify on Dec. 8, but he failed to appear. Microsoft had already told the IRS by this point that it was declining to make Ballmer and other former executives available because of a disagreement with the IRS over interview procedures. The IRS is also seeking to interview former chief Jim Allchin, former executive Bill Veghte, former Office division leader Jeff Raikes, former research and strategy chief Craig Mundie, former VP of Microsoft’s Worldwide Partner Group Jon Roskill and former marketing chief Mich Matthews, among others.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Microsoft is Presently Being Audited By the IRS
Author: Scarinci Hollenbeck, LLC
Microsoft is being audited by the IRS and they demand leaders testify
The IRS is suing a number of former and current executives of Microsoft in a bid to force them to testify in an investigation into the company’s corporate tax practices.
According to The Seattle Times, at issue is whether the company is following corporate tax law in its practices of transferring the rights to its software to various subsidiaries in countries and territories of the U.S. with low taxes. This practice is commonly used by multinational corporations with valuable intellectual properties, and reportedly had “billions of dollars of impact” on Microsoft’s taxable income between 2004 and 2006, according to the lawsuit being brought by the IRS.
How it works
Companies that have subsidiaries in countries around the world are supposed to operate as though those subsidiaries were an “arm’s length” away for tax purposes. This means negotiating and dealing fairly with each other instead of setting prices that are favorable to the company come tax time. Frequently, this is not what happen.
Picture a large, multinational company with Subsidiary A in a country or locale with low taxes but a small market for its intellectual goods. Subsidiary B is in a country with higher taxes but a much larger market. Subsidiary B makes $1 billion in profits, but to reduce the overall tax burden, the company shifts the rights to the intellectual goods to Subsidiary A and sets the “price” for Subsidiary B to sell those goods at $1 billion. The result is that Subsidiary B makes no profits on paper, meaning that it has to pay virtually nothing in corporate tax. Subsidiary A has $1 billion in profits and pays the lower taxes on those profits that are mandated by its location.
The Internal Revenue Service appears to believe that this is what is happening in the case of Microsoft, and is attempting to get to the bottom of the issue.
According to GeekWire, the IRS issued a summons to longtime CEO Steve Ballmer at his home in Seattle demanding that he testify on Dec. 8, but he failed to appear. Microsoft had already told the IRS by this point that it was declining to make Ballmer and other former executives available because of a disagreement with the IRS over interview procedures. The IRS is also seeking to interview former chief Jim Allchin, former executive Bill Veghte, former Office division leader Jeff Raikes, former research and strategy chief Craig Mundie, former VP of Microsoft’s Worldwide Partner Group Jon Roskill and former marketing chief Mich Matthews, among others.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
