Microsoft revealed recently that the IRS is seeking over $29 billion in back taxes.
The issue dates back to 2012 when Microsoft was audited by the IRS for a practice known as transfer pricing.
That audit is one of the largest corporate audits in history.
The practice of transfer pricing is not uncommon among large multinational companies, but it is ethically questionable and raises red flags with the IRS.
If a company makes a sale in a high-tax area like New Jersey which charges corporations 11.5% some or all of the proceeds are transferred to an office in a lower-tax area, such as North Carolina which pays only 2.5%
Multinational companies have even more options to avoid heavy taxation by transferring proceeds from a country with a high tax burden to one with a much smaller burden.
This is exactly what the IRS is accusing Microsoft of doing.
The 28.9 billion in back tax is related to Microsoft’s habit of moving billions of high-profit work to its Puerto Rico office from 2004 to 2013.
Microsoft, of course, disagrees with the findings and will contest them, a process that will likely take years of time to resolve.
“We strongly believe we have acted in accordance with IRS rules and regulations and that our position is supported by case law,” said Daniel Goff, a Microsoft vice president.
Microsoft also believes that is owed refunds under the Tax Cuts and Jobs Act of 2017 which could reduce the back taxes by as much as $10 billion according to the company.