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Financial analysts predict minimal financial consequences after IRS claims Microsoft owes $28.9 billion in taxes.

Microsoft Faces $28.9 Billion Back Tax Claim from IRS

Microsoft Receives Notice of $28.9 Billion Back Tax Claim

Microsoft recently disclosed that it has been notified by the Internal Revenue Service (IRS) of a back tax claim totaling $28.9 billion. The claim includes penalties and interest for the tax years 2004 to 2013. This dispute arises from how Microsoft allocated profits across different countries and jurisdictions during that period.

Potential Impact on Tax Liability

Microsoft clarified that the proposed adjustments are related to taxes paid under the Tax Cuts and Jobs Act (TCJA), which could potentially reduce the final tax liability by up to $10 billion. The company intends to appeal the IRS’s claim and does not anticipate any immediate changes to its tax liabilities. However, the appeals process is expected to take several years to complete.

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Microsoft’s Disagreement and Commitment to Compliance

In response to the proposed adjustments, Microsoft expressed disagreement and stated its intention to pursue an appeal within the IRS. The company firmly believes that it has always followed the IRS rules and has paid the taxes owed in the United States and around the world. Microsoft also highlighted its history as one of the top U.S. corporate income taxpayers, having paid over $67 billion in taxes to the U.S. since 2004.

Financial Impact and Analysts’ Perspectives

Following the news, Microsoft’s stock (MSFT) experienced a slight decline of 0.5%. However, analysts at Bank of America (BofA) do not expect a significant impact on Microsoft’s earnings per share (EPS) or free cash flow (FCF) for fiscal years 2024 and 2025.

KeyBanc analysts added that if the IRS’s stance is upheld and the full $28.9 billion tax payment is made in fiscal year 2025, Microsoft may experience a 1% reduction in annual net income due to lost interest income of approximately $800 million to $1.2 billion.

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In conclusion, Microsoft is facing a substantial back tax claim from the IRS, but the company remains committed to appealing the decision. While the financial impact is uncertain, analysts do not expect a significant effect on Microsoft’s future earnings. The appeals process is anticipated to be lengthy, and Microsoft’s compliance with tax regulations throughout its history is emphasized.

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