Microsoft and the IRS Are Fighting Again

Microsoft Corp. and the IRS are back in court, this time fighting about the U.S. tax agency’s interest in hiring David Boies, the lawyer who beat Microsoft in an antitrust case in 2000.

The software company filed a federal lawsuit May 29 in Seattle, marking the latest legal flurry over an ongoing Internal Revenue Service audit. At issue are “tens of billions of dollars” in corporate income, according to the IRS.

Microsoft is asking a court to enforce its public-records request for documents on the government’s decision to enter into a contract with Boies Schiller & Flexner LLP in 2013.

Besides the possible return of Boies as a Microsoft adversary, the case is notable because of its size and the amount of public legal wrangling even before the IRS completes its audit. Microsoft has questioned the IRS’s decision to use outside lawyers and amend its regulations to allow non-government employees to question witnesses under oath.

According to Microsoft’s lawsuit, the IRS agreed to a contract with Boies’s firm in September 2013 that paid the firm up to $350,000 and paid Boies $1,250 an hour. The IRS revealed in May that the contract was specifically for the Microsoft audit, according to Microsoft’s filing.

In an IRS filing in a related case, the agency said the contract was for ‘‘expert services” and is “related to assisting the IRS in its examination of Microsoft.”

Previous Victory

Boies, 74, didn’t respond Monday to a request for comment on his re-emergence as a Microsoft opponent. His previous victory was altered on appeal when judges overturned a breakup of the company. It’s unclear from the filings what Boies handled for the IRS in the audit dispute and whether he’s currently working on it.

The IRS later hired a second firm — Quinn Emanuel Urquhart & Sullivan LLP — on a $2.2 million contract, according to the Microsoft lawsuit.

“We’re pleased the IRS provided the documents requested by one of our previous FOIA suits and hope this additional suit helps complete the information we need to further understand the government’s process,” David Cuddy, a Microsoft spokesman, said in a statement.

Microsoft has more than tripled its offshore holdings since 2010, stockpiling profits outside the country under a rule that exempts them from U.S. taxation until the profits are repatriated. The company would owe $29.6 billion to the U.S. if it brought home its $92.9 billion stockpiled overseas, according to securities filings.

That, compared with the 35 percent U.S. tax rate, suggests the company has paid a tax rate less than 10 percent on its foreign income.

Reopened Audit

In its most recent quarterly securities filing, Microsoft said the IRS in February 2012 reopened the audit of tax years 2004 through 2006 and is still auditing tax years 2007 through 2014. The company said the case could have a “significant adverse impact,” though it doesn’t expect a final resolution within the next year.

The most significant issue relates to transfer pricing, or intracompany transactions that are supposed to be conducted as arm’s length deals. Abusive transfer pricing can let companies shift profits to low-tax or no-tax countries, instead of paying at the 35 percent U.S. rate. The IRS says the Microsoft case is “among the largest.”

In an April filing, the IRS said the audit focuses on transactions between Microsoft and its affiliate in Puerto Rico and between Microsoft and its Asian affiliate, which the IRS said in the filing is based in Bermuda.

Necessary, Legal

The agency said in court papers that its hiring of outside lawyers was necessary and legal. The IRS wouldn’t comment on the most recent case because it is pending litigation, said Jose Vejarano, an agency spokesman in Washington.

Microsoft has received support from Washington-based trade associations and from Senate Finance Chairman Orrin Hatch, who asked the cash-strapped IRS in a May 13 letter to stop using private lawyers.

“Turning over inherently government functions such as the conduct of an examination to private contractors not only jeopardizes the rights of taxpayers, but also confuses the examination process and changes the well-regulated relationship between revenue examiners and private taxpayers,” wrote Hatch, a Utah Republican.

The case is Microsoft Corporation vs. Internal Revenue Service, 15-cv-00850, U.S. District Court, Western District of Washington.