Why Investors Shouldn’t Worry about the IRS Asking Microsoft for $29B in Back Taxes

The Internal Revenue Service (IRS) demanded $28.9 billion in back taxes from Microsoft (NASDAQ: MSFT) related to the company’s profits between 2004 and 2013, the company revealed in a recent filing. Microsoft (NASDAQ: MSFT) vigorously denied the IRS’s claims, adding it would contest the agency’s move and even fight it in court if needed. The impact of the news on the tech giant’s stock was limited, with shares up approx. 5% over the last five days.

What is the IRS Accusing Microsoft of? 

In a regulatory filing published on Wednesday, Microsoft (NASDAQ: MSFT) revealed that it had received a request for $28.9 billion in back taxes from the IRS. The staggering amount concerns Microsoft’s tax liability between 2004 and 2013. 

The request for taxes, coupled with penalties and interest for late payment, represents the latest spin in the saga that has been considered the most notable challenge to a well-known form of international tax planning utilized by US tech giants to reduce their tax bills. 

The IRS has been investigating the Windows maker’s use of transfer pricing – a practice that companies use to unfairly route their profits to low-tax countries in a bid to reduce liabilities, according to critics. Over ten years ago, Microsoft revealed that it produced and marketed its software across regional centers in Singapore, Puerto Rico, and Dublin, allowing the tech giant to minimize taxes. 

For years, tech firms have been strategically placing their intellectual property overseas. By doing this, they can make a case that if a portion of the expenses associated with developing and upkeeping their critical assets is incurred in a foreign nation, then some of the profits associated with that technology should likewise be attributed to that foreign jurisdiction.

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Microsoft Denies Wrongdoing, Says It’s Ready to Fight IRS in Court

In response, Microsoft fiercely expressed disagreement with the IRS’s request, adding it would “vigorously contest” the agency’s allegations “through the IRS’s administrative appeals office” – a procedure that would last for “several years.” Furthermore, the second most valuable company in the world said it is also prepared to challenge the IRS in court if necessary. It would not put aside any extra reserves to cover the tax penalty.

“Microsoft disagrees with these proposed adjustments and will pursue an appeal within the IRS, a process expected to take several years. We believe we have always followed the IRS’s rules and paid the taxes we owe in the U.S. and around the world.”

– the company said in its filing.

The tech behemoth said it has changed its tax practices in recent years, making the concerns raised by the IRS relevant only to the past but not to the present. Additionally, any taxes owed after the IRS’s long-standing audit would be slashed by up to $10 billion based on tax laws passed by former US President Donald Trump, Microsoft added. 

Microsoft’s stock saw no negative impact at the Thursday market open, trading relatively unchanged in the past 24 hours. The company’s shares saw a notable surge in 2023, driven by the ongoing artificial intelligence (AI) craze.

Would Microsoft come out on top in its dispute against the IRS? Let us know in the comments below.