The Accounting Podcast

After a decade-long audit, Microsoft is facing a whopping $29 billion tax bill from the IRS for what the agency claims was an "illusory scheme" to channel profits through Puerto Rico—but with years of appeals ahead, will the tech giant ultimately pay the total amount?

Need CPE?
Get CPE for listening to podcasts with Earmark:
Subscribe to the Earmark Podcast:

Get in Touch
Thanks for listening and the great reviews! We appreciate you! Follow and tweet @BlakeTOliver and @DavidLeary. Find us on Facebook and Instagram. If you like what you hear, please do us a favor and write a review on Apple Podcasts or Podchaser. Call us and leave a voicemail; maybe we'll play it on the show. DIAL (202) 695-1040.

Are you interested in sponsoring the Cloud Accounting Podcast? For details, read the prospectus.

Need Accounting Conference Info? 
Check out our new website -

Limited edition shirts, stickers, and other necessities
TeePublic Store:


Want to get the word out about your newsletter, webinar, party, Facebook group, podcast, e-book, job posting, or that fancy Excel macro you just created? Let the listeners of The Accounting Podcast know by running a classified ad. Go here to create your classified ad:

The full transcript for this episode is available by clicking on the Transcript tab at the top of this page

Creators & Guests

Blake Oliver
Founder and CEO of Earmark CPE

What is The Accounting Podcast?

The Accounting Podcast (formerly the Cloud Accounting Podcast) is the world's #1 accounting, bookkeeping, and tax podcast! Join us weekly for a roundup of accounting news, analysis, and interviews. Plus, earn free NASBA-approved CPE credits for listening with the Earmark app. Learn more at

I'm Blake Oliver, and this is The Accounting Podcast.

Today, we're looking at the huge tax bill Microsoft is facing after a lengthy IRS audit. In 2012, the IRS launched its largest-ever audit, accusing Microsoft of using offshore tax havens to avoid paying US taxes. The audit focused specifically on Microsoft's use of subsidiaries located in Puerto Rico, where it was able to negotiate favorable tax rates.

After a decade of litigation between Microsoft and the IRS, the agency has now determined that Microsoft owes $28.9 billion in back taxes plus penalties and interest for the years 2004 to 2013. Microsoft says this bill is inflated by at least $10 billion and plans to appeal.

Some background on how Microsoft set up its tax avoidance scheme:

According to ProPublica, in 2005, Microsoft sold some of its most valuable intellectual property, including brands and copyrights, to an approximately 100-person factory it owned in Puerto Rico.

Microsoft had negotiated a deal with Puerto Rico to pay essentially zero percent corporate tax on the island. The company then channeled its global profits through this Puerto Rican subsidiary by having it produce and sell Microsoft software.

The IRS claimed this was illusory, a scheme solely meant to avoid taxes, with the small Puerto Rican operation pretending to generate $30 billion worth of profits by simply burning Microsoft software onto CDs.

The agency also claimed Microsoft had significantly understated its revenue projections during this period by as much as $15 billion annually. Fast Company reports that when the IRS started digging into the scheme, Microsoft lobbied Congress to try to restrict the agency's audit reach. A bipartisan bill did pass, but it didn't end up impacting this particular audit.

In response to the massive proposed tax bill, Microsoft says it followed all applicable IRS rules and plans to appeal the decision within the agency first, a process expected to take years. If the issue still remains unresolved after going through the IRS appeals process, Microsoft says it will take the case to court. The company also believes the final amount owed will be reduced by taxes already paid overseas.

So, this epic audit and legal battle seems far from over.

The final tax bill and broader implications for Microsoft and the IRS remain to be seen. We'll stay on this story. This has been a news update from The Accounting Podcast. I'm Blake Oliver. Thanks for listening.