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In a stunning development, the Internal Revenue Service has notified Microsoft that the tech giant owes an extra $28.9 billion in back taxes from 2004 to 2013. The IRS claims Microsoft underpaid taxes by improperly allocating profits between the U.S. and offshore subsidiaries to minimize its tax bill.

Microsoft strongly contests the IRS’ findings and vows to fight the massive tax bill. The company says it has always complied with tax laws and paid what it owes. The dispute sets up a monumental legal battle between the IRS and one of the world’s most valuable companies.

IRS: Microsoft Underpaid Taxes by $28.9 Billion

On October 11th, Microsoft revealed in an SEC filing that the IRS sent the company Notices of Proposed Adjustment indicating it owes $28.9 billion more in federal taxes for the 2004 to 2013 period.

The IRS asserts Microsoft improperly shifted profits to Puerto Rico, Ireland and other offshore subsidiaries to lower its U.S. tax obligations. This technique, known as transfer pricing, is commonly used by multinationals. The IRS believes Microsoft abused transfer pricing to evade billions in taxes.

Microsoft utilized a complicated web of subsidiaries in tax havens to route licensing revenue and intellectual property overseas, away from higher-tax U.S. jurisdiction. The IRS alleges Microsoft did not pay enough taxes on revenue properly attributable to the U.S.

Microsoft Plans Administrative and Legal Challenges

Microsoft said it “disagrees” with the IRS’ findings and plans to launch an administrative appeal, a process that could take several years. The tech company indicated it is willing to take the IRS to court if needed to contest the massive tax adjustment.

“We believe we have always followed the IRS’s rules and paid the taxes we owe in the U.S. and around the world,” stated Microsoft in the SEC filing.

Microsoft contends up to $10 billion in taxes already paid are not reflected in the IRS’ demands. The company believes its income tax reserves are sufficient and it is fully compliant with tax regulations.

Epic Legal Battle Looming Over Microsoft’s Tax Obligations

The dispute with the IRS sets up a monumental battle over Microsoft’s tax practices and use of offshore subsidiaries. The IRS clearly believes Microsoft abused loopholes and accounting tactics to dodge billions in U.S. taxes.

With $28.9 billion at stake, Microsoft is sure to mount an aggressive legal challenge. The case will likely take years winding through administrative appeals and federal courts. It could ultimately end up in the Supreme Court.

The IRS has stepped up scrutiny of large corporations using offshore subsidiaries, transfer pricing and other mechanisms to lower tax obligations. Tech giants like Google, Apple and Amazon also utilize elaborate international corporate structures and face IRS probes.

But Microsoft’s tax adjustment dwarfs past actions against other tech companies. The $28.9 billion bill is nearly 3 times larger than the $9.5 billion tax bill slapped on Apple in 2016.

Microsoft Pledges to Defend Itself Vigorously

Microsoft asserted that up to $10 billion in taxes already paid to the IRS are left out of the demands. This implies that even if Microsoft loses, the amount owed would be substantially reduced.

Nonetheless, with nearly $29 billion at stake, Microsoft is sure to mount a maximum legal defense. The tech giant has the resources and motivation to fiercely contest the IRS’ claims through every avenue available.

Microsoft stated it “will pursue an appeal” and noted it has always complied with tax rules. The company appears geared up for a knock-down legal fight that could drag on for years before final resolution.

Ultimately, the courts will decide whether Microsoft properly paid taxes on profits shuffled through its complex web of international subsidiaries. IRS crackdowns on profit shifting and corporate tax avoidance indicate the agency strongly believes Microsoft crossed lines.

This epic tax battle will be closely watched as governments around the world take aim at multinationals’ elaborate tax minimization structures. The stakes are high on both sides, suggesting a long, grinding legal war lies ahead.

Stay tuned to our publication as we continue to cover developments in Microsoft’s tax dispute with the IRS. This case has massive implications for multinational corporations, tech giants, international tax rules and the IRS itself. We will keep readers updated each step of the way in this monumental legal battle.

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