Equipment Type

IRS Hikes Proposed Caterpillar Tax Penalty To $2.3 Billion

Caterpillar said the IRS completed its examination of income tax returns for 2010 to 2012 and has increased its proposed tax penalties to approximately $2.3 billion for the 2007 through 2012 audits.

February 15, 2018
Caterpillar said the IRS has increased its proposed tax penalties to approximately $2.3 billion for the 2007 through 2012 audits.

Caterpillar posted its annual 10-K report filed with the U.S. Securities and Exchange Commission on Thursday and said that the IRS completed its examination of Cat’s U.S. income tax returns for 2010 to 2012 and has increased its proposed tax penalties to approximately $2.3 billion for the 2007 through 2012 audits.

The tax case centers on an offshore tax strategy that Caterpillar initiated when a Cat tax specialist sought whistle-blower protection and the matter ultimately ended up in the hands of a U.S. Senate subcommittee investigation.

The strategy involved the company’s lucrative parts business and a Swiss subsidiary. Profits for the parts sales were recorded in Switzerland — and taxed at a lower rate than in the U.S. — though a vast majority of operations remained in the United States. The Senate subcommittee labeled the tax maneuver an abusive corporate tax shelter.

In its annual 10-K filing  Caterpillar reiterated its position that the maneuver complied with U.S. tax laws, and the company has continued to file its federal income tax returns on the same basis for years after 2012.

"On January 31, 2018, we received a Revenue Agent's Report from the IRS indicating the end of the field examination of our U.S. income tax returns for 2010 to 2012. In the audits of 2007 to 2012 including the impact of a loss carryback to 2005, the IRS has proposed to tax in the United States profits earned from certain parts transactions by CSARL, based on the IRS examination team’s application of the “substance-over-form” or “assignment-of-income” judicial doctrines. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. income tax returns on this same basis for years after 2012. Based on the information currently available, we do not anticipate a significant increase or decrease to our unrecognized tax benefits for this matter within the next 12 months."

The IRS last year challenged CAT’s taxes for 2007-12 and on March 2-3, 2017, agents with the Department of Commerce, the Federal Deposit Insurance Corporation and the Internal Revenue Service executed search and seizure warrants at three Caterpillar facilities in the Peoria, Illinois area.

 

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