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A criminal tax investigation and some unusual raids

It is not often that IRS enforcement agents show up at the door of a Fortune 100 company. But this is just what recently occurred at three Caterpillar locations.

The raid of the heavy machinery manufacturer is likely linked to profits from a Swiss subsidiary. The company has been accused of using an aggressive tax strategy to shift profits abroad to lower its tax burden.

Avoiding federal warrants in the first place

Caterpillar has been in the cross hairs for awhile. A Senate report accused the company of shifting profits abroad for almost 20 years to avoid $2.4 billion in US taxes.

Some of the allegations contained in the report were that the company was sending profits from its parts business to a subsidiary in Switzerland. This was occurring even though no employees or business activities had actually been transferred abroad.

The company had negotiated a more favorable tax rate of between four and six percent with the Swiss. This maneuver decreased the parts-business profits that were subject to US tax.

This strategy referred to as transfer pricing has exposed to company to significant liability. The IRS is demanding back taxes and penalties of $2 billion. The company has been defending itself claiming it does not owe any additional taxes. The recent raids indicate that the investigation has broadened out to include a parallel track that may bring criminal tax charges.

While not every audit includes a two track investigation that could include the potential for criminal charges, it is important to speak with a tax attorney at the first sign of a tax audit or investigation. The right strategy ensure that enforcement agents never appear at your door.

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