The US taxman thinks Microsoft owes billions. Prove it, says Microsoft

Redmond: It's been years. Get in court and show us the bill, or get lost

The ongoing squabble between Microsoft and the US Internal Revenue Service is heading to court, beginning with a hearing to take place in a Seattle federal court on Tuesday.

The case is gearing up to become one of the largest-ever legal battles between tax authorities and a US corporation over the practice of shifting assets to overseas subsidiaries as a way of avoiding US tax.

The IRS has alleged that deals Microsoft struck with subsidiaries in Bermuda and Puerto Rico between the years of 2004 and 2009 have potentially cost the US Treasury billions in tax revenue. But Redmond thinks the top tax agency's snooping has gone on long enough and it should either produce a hard figure or drop the whole matter.

Microsoft also claims the IRS acted improperly when it hired two outside law firms to help it in its investigation, which the software giant describes as improperly delegating a government function to a private firm.

Microsoft has filed two Freedom of Information Act (FOIA) requests to see documents exchanged between the IRS and the law firms it contracted, including Quinn Emanuel Urquhart & Sullivan and Boies Schiller & Flexner. The IRS has provided some such documents but Microsoft thinks it should be compelled to produce more.

The taxmen disagree, saying it is Redmond that has yet to produce required documents. In December, the IRS sued Microsoft, former CEO Steve Ballmer, and a raft of other executives, alleging they had failed to "fully comply with and obey" a legal IRS summons.

"The IRS routinely issues summonses to taxpayers to request information (which may include both documents and testimony) in support of an examination into the taxpayer's liability)," the agency observed in a court filing. "As the courts have repeatedly noted, the IRS summons authority is 'broad'."

In a response filed with the court, Microsoft said that it had complied with the summons, "producing approximately 1.2 million pages of documents and making over 50 employees available for interviews, in response to 220 Information Document Requests ('IDRs') issued by the IRS."

Microsoft further accused the IRS of "issuing an eleventh-hour barrage of summonses" as a means of forcing a hasty settlement.

The proceedings are due to commence on Tuesday with an all-day evidentiary hearing to take place in the US District Court in Seattle, Western District of Washington. In an order issued on Friday, Judge Ricardo Martinez said the court would allow attorneys and their staff to bring lunch. ®