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Caterpillar Inc., Under the Gun with $2.4 Billion IRS Audit

Caterpillar EquipmentThings are not starting the the new year off right for manufacturing giant Caterpillar, Inc. Last year the IRS came down on Caterpillar for attempting to use some creative accounting practices to avoid paying tax on earned income.

The investigation by the IRS started many years ago and was officially entered into legal precedent last March. Investigators have stated that Caterpillar has evaded paying their full share of taxes going back 18 years. If found to be true the company used illegal tax strategies to save over $2.4 billion.

A senate hearing in 2014 determined the company had been using one of its subsidiary companies in Switzerland to (Caterpillar SARL) to funnel profits, sales and international orders. The strategy works by bringing earnings back to the United States through Switzerland but avoiding US tax for sales made outside of the country. Switzerland has a long history of being a tax shelter for 3rd party individuals and businesses. The senate committee concluded that over $8 billion in profits had been funneled through Switzerland holdings.

Caterpillar has maintained that its tax strategy is legal albeit outside of the box of normal corporate tax accounting. The company effectively paid a 4% corporate tax rate for most years going back to 1999. Some employees at Caterpillar questioned the practice and brought the discovery to outside authorities which began an investigation.

The company is still under investigation as the federal government audits their books at Peoria, Illinois headquarters. The initial raid by the Internal Revenue Service and the Office of Export Enforcement at the Department of Commerce seized millions upon millions of documents at the Peoria and Morton corporate facilities. Caterpillar has blocked part of the investigation stating most records should be sealed under attorney-client confidentially.

Leaked copies of the search warrant indicated that Caterpillar violated export controls dealing with countries under U.S. sanctions such as Syria, Sudan and Iran.
PriceWaterhouseCoopers, which handles Caterpillar’s tax management strategy, has been found to also be liable in the investigation. PwC tax partner Thomas Quinn wrote in a 2008 memo that the company would “have to do some dancing” in terms of complying with IRS rules regarding Non-U.S tax exemptions. Managing Director Steven Williams was also quoted as saying “What the heck. We'll all be retired when this comes up on audit."

The news is another devastating blow to thousands of employees at the Peoria campus as company recorded four straight years of losses and amidst layoffs. Since 2015 the organization has closed more than 30 of its US and International plants. The company also recently released news they are cancelling plans for a brand new Headquarters in East Peoria and moving operations to a more cost effective location. Caterpillar has wavered in recent years exiting the over-road trucking business in 2010 amid class action law suits with their emissions ACERT technology and betting big on overseas expansion in China which has since cooled.

Caterpillar CEO Jim Umpleby said in an interview with the Wall Street Journal “We’re a values-based company. “We’re cooperating, and we’re hopeful that that issue will be resolved in an expeditious manner.” Only time will tell but hopefully Caterpillar recovers from this situation and puts this behind them.