It seemed simple enough: The IRS sends Microsoft a notice about an intent to audit transfer pricing between Microsoft and several offshore affiliates. However, the IRS used an external law firm to serve the Notice upon Microsoft, and to aid them in the audit itself.
The case has become a landmark dispute over the IRS’ use of outside counsel. A US District Court in Washington State has granted an evidentiary hearing in the matter. Microsoft has raised two primary legal issues with the IRS:
1. Hiring an outside law firm to help with the conduct of audits inherently outsources a government process, which abuses the Courts, and
2. The facts and circumstances surrounding how the outside firm was hired raised a “plausible inference” about it’s role in the audits themselves.
The core issue of the audit is an issue known as “transfer pricing,” the sale of goods or services from one related or affiliated corporate entity to another. There are laws that govern the establishment of transfer pricing to prevent companies from hiding income by falsely pricing the transfer of goods or services between their own corporate holdings. These transfers often include international transactions that are further complicated by the value of the underlying currencies and calculating a fair rate of exchange upon which to consumate the transaction.
Transfer pricing strategies and IRS audits are complex legal issues for any corporation. If you have been contacted by the IRS regarding international tax issues such as transfer pricing or an IRS audit we invite you to contact Allen Barron for a complimentary and substantive consultation at 866-631-3470.