The IRS and the fight with large corporations over income taxes

The Internal Revenue Services (IRS) has recently stated that some of the most prosperous companies in America have been moving money around in order to avoid paying federal income taxes.

Tech giants with small tax bills

Microsoft is one of the biggest companies in the entire world yet they have even come under scrutiny for avoiding paying the taxes they owe. The IRS are fighting them to collect more than $2 billion from profit which they have been transferring to foreign affiliates. Another massive multinational company dodging taxes and fighting the IRS to keep a whopping $1.5 billion debt is They have also been transferring profits to a tax sheltered European subsidiary in order to avoid paying tax in America.
$1.5billion is more than the company has made in the last 5 years! Former tax attorney for Vanguard David Danon has recently made allegations about the Vanguard Group. He voiced his concerns to the IRS and state tax agencies regarding the improper transferring of money between affiliates again to avoid paying income taxes. The IRS and Vanguard are not are not litigating the issue however and Vanguard have not reported any further consequences on their taxes.

All of these huge corporations have been blamedof paying a lot less tax than they should be, according to market-level prices. They have done this by transferring billions of dollars between associates in other countries to minimise their tax bills.

Samuel Maruca,a tax attorney of the Washington law firm Covington and Burling, said that the IRS has become more concentrated on ensuring that transfer pricing is imposed. He even moved to the Washington law firm after leaving the IRS where he was the first transfer pricing director from 2011 to 2014.
He claims this problem has been around and kept behind the scenes for the last 50 years. He states it has only come the public attention since 2013. Congressional hearing have been looking into the reasons why such big companies have been paying such little taxes.
Since this loop hole has been noted the IRS is now looking into over 1,000 “transfer pricing” cases. Businesses have been moving money abroad and avoiding higher-tax U.S. operating units to tax-protected associations. The IRS is looking to collect upwards of $194 billion in unpaid taxes from schemes like these. Even though the IRS will not discuss any cases we know this as they can sometimes become public knowledge when they go to court.

The transfer of money between U.S. associates of a business rather than multinational corporate transfers such as the Vanguard allegations is unusual.
Danon’s lawyers issued the IRS a 10 page report by University of Michigan law professor with tax expert Reuven S. Avi-Yonah. He declared that the government would almost certainly win the case should they go to court and force Vanguard to pay $35 billion in back taxes from the previous 6 years. Vanguard avoided these taxes by charging its tax protected mutual funds artificially low fees for stock-picking and other services, and for setting up an untaxed cash reserve.
Vanguard have always stated that they comply with federal laws. Yet they still will not make any comment on of the particulars of the report by Avi-Yonah who Danon’s lawyers hired for his expertise.

If the IRS and other tax agencies win the case, Danon expects to collect a large portion of the outstanding federal and state income taxes. As you can imagine he will be trying hard to win this case but he will only be granted the sum of money should the IRS come to an agreement that he is correct and recognise that he reported it. Many tax experts such as tax attorneys and lawyers think that critics have the law on their side. Many people are still happy Vanguard customers and think that they haven’t done anything wrong. This is because they don’t believe Vanguard have ripped off investors with ridiculously high fees. Lee Shepard, a tax lawyer in Falls Church, VA finds it hard to review the complaints against Vanguard. He states that Danon and his lawyers are correct about the law however, it would mean Vanguard charging the same as other companies charge.

Glaxo Smithkline

In 2006 Glaxo SmithKline paid $3.1 billion in order to settle an IRS transfer-pricing case. Tax attorneys say the IRS was unable to get the courts to sanction its estimates of how much Veritas Software Corp and computer chip-maker Xilinx should have valued transfer payments, in other key cases.
A former IRS official has said that although the IRS has the law on its side in these cases which are worth so much, it simply isn’t enough. He says that the IRS has been subject to budget cuts leaving it short of resources. The IRS has to weigh up whether it will be able to afford to take each case to court and win.

No doubt there will be many cases where it is cheaper and easier to settle for a small portion of what a big corporation actually owes. The outcome of the cases with and Microsoft will more than likely be setting the tone for all future IRS cases.

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