Microsoft ordered to turn over records for historic IRS audit

Microsoft was ordered to turn over a trove of tax records last week amid a historic and long-running audit by the IRS that received new attention after an explosive ProPublica report on Wednesday. 

A federal judge in Washington state declared that Microsoft must turn over key documents within the next seven days, a shot in the arm for an expansive IRS audit that has dragged on for more than 12 years. The IRS has been investigating whether Microsoft shifted intellectual property worth billions of dollars to Puerto Rico in violation of U.S. tax law. 

“The government believes that Microsoft’s cost sharing arrangements … impermissibly shifted revenue out of the United States, both decreasing Microsoft’s federal income tax liabilities and obtaining more favorable foreign tax treatment,” the filing on Friday reads. 

Microsoft had sought to conceal the relevant documents in the case, arguing they should remain confidential. But U.S. District Judge Ricardo Martinez declared almost none of the more than 100 documents are protected.

The IRS is investigating whether Microsoft shifted $39 billion in U.S. profits to Puerto Rico in order to receive a nearly zero percent tax rate. The agency has found that Microsoft moved billions of dollars in profits to avoid taxes, according to the investigation by ProPublica and Fortune. 

“This was a pure tax play and because we took the factory live by July 1 we were able to start claiming the tax benefit as planned,” one Microsoft executive wrote, according to the article.

Martinez reportedly made the decision to reawaken the case shortly after ProPublica contacted him for its investigation. 

“On Jan. 17, 2020, after this story was finalized for publication, but before it published, U.S. District Court Judge Ricardo Martinez issued his ruling on the remaining, disputed documents,” reads an editor’s note within the ProPublcia article. “It was another big win for the IRS in the case. (Martinez, who had taken the better part of three years to consider the ruling, issued it 10 days after ProPublica inquired about the delay.)” 

Microsoft in a statement said the ruling is not about “Microsoft’s historical tax arrangements. 

“The Judge acknowledged that this procedural ruling about document production is based on limited information, and is not a ruling on the validity of Microsoft’s historical tax arrangements,” the company said.  

—Updated at 4:34 p.m.