For Microsoft audit, IRS hires lawyer who beat them in antitrust

According to a quarterly securities filing, the IRS has been auditing 11 years of Microsoft's tax filings. This includes an ongoing audit of tax years 2007 through 2014 and a reopened audit of tax years 2004 through 2006, with the main issue being transfer pricing.

Transfer pricing refers to certain transactions between subsidiaries and related companies. When these shift assets or funds amongst one another, it has to be for legitimate business reasons and with appropriate cost shifts; not to avoid taxation. An abuse of this process could wrongfully shift taxable income from subsidiaries operating in higher-tax countries to those operating in lower-tax countries.

Microsoft's offshore holdings have more than tripled since 2010, allowing it to benefit from an U.S. tax exemption on profits of foreign subsidiaries that have never been repatriated. Its holdings abroad could also, however, allow abusive transfer pricing. The company is thought to be stockpiling some $92.9 billion in profits abroad.

The upshot is that the IRS's current audits of Microsoft add up to one of the largest IRS cases against a business in history, and Microsoft claims a loss would have "a significant adverse impact."

Can the IRS hire your nemesis to advise it in the case against you?

The big case against Microsoft is interesting, but one of the more startling aspects is that the agency brought in an outside expert specifically for this case -- at $1,250 an hour.

Who? None other than David Boies -- the guy who took down the Goliath in a 2000 antitrust case. The IRS retained Boies's firm two years ago for up to $350,000 in work specifically on the Microsoft audit. Later, it signed a $2.2 million contract with a second law firm.

On May 29, Microsoft filed a federal lawsuit related to those contracts. In part, the lawsuit seeks internal IRS records on how the decisions were made. More significantly, it accuses the IRS of changing its own regulations to allow it to give third-party lawyers the power to question people under oath, a power previously limited to IRS employees.

The IRS says its actions are both legal and necessary. In May, however, the chairman of the Senate Finance Committee suggested that bringing in outside lawyers is unduly costly in light of the IRS's funding woes -- and warned that allowing non-government contractors to handle inherently governmental functions may jeopardize taxpayers' rights.

Source: Accounting Today, "Microsoft-IRS Dispute Escalates, Now About Company Nemesis Boies," Richard Rubin and Dina Bass, Bloomberg, June 2, 2015

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