Microsoft Faces Potential $28.9 Billion Tax Bill as IRS Targets Back Taxes

In a regulatory filing submitted on Wednesday, Microsoft disclosed that it had received Notices of Proposed Adjustment from the Internal Revenue Service (IRS) regarding its tax obligations. The IRS is requesting an additional tax payment amounting to a whopping $28.9 billion from the tech giant.

Microsoft Facing Substantial Tax Bill

Microsoft is facing a substantial tax bill after the IRS indicated that the tech giant owes approximately $28.9 billion in back taxes, in addition to penalties and interest for the tax years spanning 2004 to 2013. This development was disclosed in a recent Securities and Exchange Commission (SEC) filing.

Responding to the IRS audit, The Verge reported that Microsoft's corporate VP for worldwide tax and customs, Daniel Goff, emphasized that the company has undergone significant changes in its corporate structure and practices compared to the period covered by the audit.

"For nearly a decade, as we have previously disclosed in our financial statements, Microsoft has been working with the IRS to address questions about how we allocated our income and expenses for tax years beginning as far back as 2004," Goff stated.

He noted that the issues raised by the IRS pertain to the past and are not indicative of the company's current tax practices. Goff also pointed out that the IRS's proposed adjustments do not account for the amounts Microsoft paid under the Tax Cuts and Jobs Act.

Goff suggested that this factor could reduce the final tax liability by as much as $10 billion. Furthermore, Microsoft asserted that the IRS is in disagreement with the company's method of profit allocation on an international scale, primarily through the utilization of transfer pricing in a structure known as cost-sharing.

IRS has asserted that Microsoft is liable for an additional $28.9 billion in taxes related to the years 2004 through 2013, a sum that also encompasses penalties and interest.

It is important to note that the IRS's proposed adjustments don't serve as a final verdict. Notably, the proposed adjustments do not account for the taxes Microsoft has already paid under the Tax Cuts and Jobs Act (TCJA), which is a factor that could potentially reduce the final tax liability by as much as $10 billion.

Microsoft Contesting the IRS Notice

The Associated Press reported that Microsoft intended to challenge the notifications issued by the IRS and is prepared to engage in a lengthy administrative appeals process, with potential readiness for legal action if required.

In a press release, Microsoft strongly disagreed with these proposed adjustments and is prepared to initiate an appeal within the IRS. However, this process is anticipated to extend for several years.

Microsoft also asserted that it has consistently adhered to the IRS regulations and has met its tax obligations, both in the United States and internationally.