The sordid tale of Microsoft's epic tax evasion and the war they waged against the IRS

Microsoft maintains the fiction that it has sold its most valuable copyrights and other intangible assets to a tiny factory in Puerto Rico, where, thanks to promising to hire a mere 85 workers, it pays effective zero tax; the company transfers almost all its profits to this factory to "license" its own crown jewels, making the company totally unprofitable on paper, and thus immune from taxation.

An IRS team that audited Microsoft used extraordinary, long-dormant powers to force the company to cough up documents that shed light on the nature of the fraud, and revealed that the scheme originated with noted criminal fraudsters KPMG, and uncovered internal communications in which execs from both Microsoft and KPMG expressly stated that the scheme was a legal fiction and that the entire project was designed to evade taxes.

The IRS assembled a 60-person team, including elite outside lawyers, and tried to take Microsoft to the mat. Instead of settling or admitting fault, Microsoft hired PWC (another consulting giant implicated in corrupt dealings) to lobby congress to neuter the IRS, and congress obliged, thanks to a bipartisan coalition (led by Orrin Hatch [R-UT]).

Nevertheless, the IRS's Microsoft audit continues, and may yet prevail. Propublica's excellent longread on the saga is like a corporate crime-drama come to life, full of personality and storytelling that illuminates a corporate crime that is otherwise a confusion of incredibly dull and wicked scheming.

Microsoft’s complaints grew louder when Hoory and a Justice Department attorney presented the IRS’ side. In addition to laying out the Puerto Rico transaction, Hoory divulged details that made an obvious tax dodge look even worse. Microsoft’s lawyers called that “mudslinging” meant to “punish” the company “for daring to oppose the IRS.”

Hoory testified that Microsoft had used a growth rate of 4% for tax purposes while publicly reporting to investors expected growth of 10% to 12%. One error in their calculations, he said, had “understated revenues by approximately $15 billion.”

After almost four hours of testimony, Hoory stepped down. “It has been a long day,” U.S. District Court Judge Ricardo Martinez said. “Mr. Hoory talks a mile a minute, and it was hard to follow up on all of that.” He added, turning to Hoory, “Working for the IRS is a good job for you.”

The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher. [Paul Kiel/Propublica]