In the tax clash of the century, Team Microsoft dealt Team IRS a black eye

After the IRS opened up an audit on Microsoft for avoiding taxes by shifting profits offshore, Microsoft got the rest of the business community to help it change the rules.


January 23, 2020

Eight years ago, the IRS went to war with Microsoft. The software giant had moved at least $39B in profits to Puerto Rico — by offloading its intellectual property to a small factory it owned there.

The government saw it as a classic case of tax dodging. So the IRS kick-started the biggest audit by dollar amount in its history.

But, as ProPublica reports, Microsoft didn’t take things lying down…

The IRS picked the fight, but Microsoft hit back harder

The IRS wanted to use the Microsoft case to crack down on the common practice of tax dodging, so it pulled out all the stops, such as hiring outside firms.

But Microsoft responded by rallying other tax dodgers (“Guys, this could happen to you”) to its support — and soon some battle lines were drawn…

In one corner sat Team IRS:

  • A high-powered law firm, which was an unusual move for the IRS that signaled the agency’s seriousness

In the other corner sat Team Microsoft:

  • The US Chamber of Commerce, which theoretically didn’t want entrepreneurs to fear doing business
  • Several Big Tech lobbying groups, which feared the tax man would come after them next
  • Bipartisan members of Congress, who feared the IRS’s actions would stifle business

So, what happened in the tax matchup of the century?

Well, Microsoft pretty much just got away with it

Team Microsoft succeeded in changing the law and reducing the IRS’s powers to pursue other corporate tax dodgers.

Microsoft may still pay a penalty, since the case isn’t closed. 

If the fight sounds obscure, here’s why it’s still significant: Corporate tax avoidance has increased sharply in recent years. The percentage of profits that US corporations shifted offshore increased from 4.6% in 1996 to 19% in 2017.

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