The lawsuit, which was filed Friday in the U.S. District Court for the Western District of Washington, seeks information from the IRS about contracts it made with two high-powered law firms to investigate Microsoft. What sparked the case are a pair of Freedom of Information Act (FOIA) requests the company made regarding deals with Quinn Emanuel Urquhart & Sullivan, LLP and Boies Schiller & Flexner, LLP.
The extensive audit by the IRS stems over how tax is calculated for income made by Microsoft overseas, including its transfer prices to local affiliates in Bermuda and Puerto Rico. Retaining profits abroad is a common practice that can lower a U.S.-based company's tax burden.
According to the complaint, Boies Schiller was awarded a $350,000 contract in 2013 to provide legal services to the IRS in connection with its audit of Microsoft. David Boies, the firm's chairman, who's known for his role as the lead prosecutor in the U.S. Justice Department's antitrust suit against Microsoft, was named as lead counsel in the contract. It's not clear what his role was or if he's still on the IRS case.
Last year, Quinn Emanuel was awarded a contract worth almost $2.2 million to provide the IRS with legal services connected to the Microsoft audit. The IRS also issued a temporary regulation on June 18, 2014, to allow contractors like Boies Schiller and Quinn Emanuel to question witnesses under oath.
Microsoft filed the FOIA requests earlier this year. The tax agency hasn't responded to them, even though the deadline for their response has passed. That's why Microsoft filed this lawsuit: It's an attempt to compel the IRS to give up what information it has. This is the third such lawsuit Microsoft has filed since November, when it first requested that the IRS provide information about its contract with Quinn Emanuel. Microsoft says the requests are important for understanding the process connected to its audit.
"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," a company spokeswoman said in a statement.
All of this wrangling comes ahead of the actual resolution to the audit. In its most recent quarterly financial report, Microsoft said that the audit stretches from the 2004 tax year through 2014. The IRS's final decision could have a "significant adverse impact" on Microsoft's business when it finally comes down, Microsoft said.
The case has drawn the interest of Senate Finance Committee Chairman Orrin Hatch. The Republican from Utah questioned the legality of the IRS's third-party law contracts in a letter sent to the agency last month and demanded that the agency "immediately halt the use of the private contractors described above for both the examination of records and the taking of sworn testimony."
He said the Internal Revenue Code prohibits the IRS from bringing in outside firms in the way that it did, and also criticized the amount of money that the agency spent on the contracts with Boies Schiller and Quinn Emanuel.
A representative for the IRS did not respond to a request for comment on this report.