Microsoft is being audited by the IRS and they demand leaders testify
The IRS is suing a number of former and current executives of Microsoft in a bid to force them to testify in an investigation into the company’s corporate tax practices.
According to The Seattle Times, at issue is whether the company is following corporate tax law in its practices of transferring the rights to its software to various subsidiaries in countries and territories of the U.S. with low taxes. This practice is commonly used by multinational corporations with valuable intellectual properties, and reportedly had “billions of dollars of impact” on Microsoft’s taxable income between 2004 and 2006, according to the lawsuit being brought by the IRS.
How it works
Companies that have subsidiaries in countries around the world are supposed to operate as though those subsidiaries were an “arm’s length” away for tax purposes. This means negotiating and dealing fairly with each other instead of setting prices that are favorable to the company come tax time. Frequently, this is not what happen.
Picture a large, multinational company with Subsidiary A in a country or locale with low taxes but a small market for its intellectual goods. Subsidiary B is in a country with higher taxes but a much larger market. Subsidiary B makes $1 billion in profits, but to reduce the overall tax burden, the company shifts the rights to the intellectual goods to Subsidiary A and sets the “price” for Subsidiary B to sell those goods at $1 billion. The result is that Subsidiary B makes no profits on paper, meaning that it has to pay virtually nothing in corporate tax. Subsidiary A has $1 billion in profits and pays the lower taxes on those profits that are mandated by its location.
The Internal Revenue Service appears to believe that this is what is happening in the case of Microsoft, and is attempting to get to the bottom of the issue.
According to GeekWire, the IRS issued a summons to longtime CEO Steve Ballmer at his home in Seattle demanding that he testify on Dec. 8, but he failed to appear. Microsoft had already told the IRS by this point that it was declining to make Ballmer and other former executives available because of a disagreement with the IRS over interview procedures. The IRS is also seeking to interview former chief Jim Allchin, former executive Bill Veghte, former Office division leader Jeff Raikes, former research and strategy chief Craig Mundie, former VP of Microsoft’s Worldwide Partner Group Jon Roskill and former marketing chief Mich Matthews, among others.
Non-disclosure agreements (NDAs) remain a critical tool for protecting sensitive business information. However, New York NDA requirements have evolved, and businesses must ensure these agreements are carefully drafted to remain enforceable. In a competitive market like New York City, NDAs are commonly used to protect proprietary information, client relationships, and strategic plans. At the same […]
How Courts Evaluate Testamentary Capacity and Undue Influence Will contests in New Jersey are difficult to win, given the strong presumption that a properly executed will reflects the testator’s intent. However, challenges based on lack of testamentary capacity and undue influence remain common, particularly where there are concerns about mental capacity or the involvement of […]
Bringing on outside investors can provide the capital and strategic support a business needs to grow. However, raising capital also introduces important legal, financial, and operational considerations. Before bringing on investors, businesses should address key legal issues to reduce risk, streamline investor due diligence, and position the company for long-term success. Early preparation signals that […]
How the Updated Law Shapes Retirement and Estate Planning The SECURE 2.0 Act of 2022 materially reshapes the required minimum distribution (RMD) landscape, extending tax deferral opportunities while accelerating distribution requirements for many beneficiaries. For high-net-worth individuals and families, these changes are not merely technical. They require a reassessment of retirement income strategies, beneficiary planning, […]
Buying Commercial Property in New Jersey: Legal Guide for Small Businesses
Small businesses considering buying commercial property in New Jersey must evaluate a range of legal, financial, and operational factors. While ownership can offer long-term value and control, it also introduces significant risks if not properly structured. This guide outlines key considerations to help New Jersey business owners make informed decisions, minimize legal exposure, and successfully […]
The SEC’s Latest Guidance on Applying Federal Securities Laws to Tokenized Securities
On January 28, 2026, staff of the U.S. Securities and Exchange Commission’s Divisions of Corporation Finance, Investment Management, and Trading and Markets issued a joint statement clarifying how existing federal securities laws apply to tokenized securities. The SEC’s “Statement on Tokenized Securities” does not establish new law, but it does provide greater clarity on the […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
