Caterpillar Settles Long-Running IRS Tax Dispute with No Penalties

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Caterpillar has settled its seven-year tax dispute with the IRS and will not pay any penalties.

Caterpillar has reached a settlement with the Internal Revenue Service in a seven-year tax dispute in which the IRS said the company owed $2.3 billion in taxes and penalties.

The company revealed September 8 it had resolved the dispute for tax years 2007 through 2016, and it will not pay any penalties. The amount of the settlement was not disclosed in the company’s SEC filing announcing the agreement.

The dispute began in 2015 when the IRS notified the company of owing increased taxes and penalties on profits for its Caterpillar SARL parts subsidiary in Switzerland. In 2017, federal agents raided three Caterpillar offices in Illinois seeking documents related to the company’s taxes. The following year, Caterpillar revealed in an SEC filing that the IRS was seeking $2.3 billion in taxes and penalties. Soon after William Barr, who had represented Caterpillar, was appointed U.S. Attorney General in 2018, the investigation “stalled,” according to a Reuters report.

The IRS’s interest in Caterpillar’s taxes stemmed from a wrongful termination lawsuit filed by a former Cat accounting executive in 2009. Daniel Schlicksup accused the company of shifting U.S. profits offshore to shell companies in Switzerland and Bermuda. Schlicksup alleged he had alerted Caterpillar executives of illegal tax treatments in 2007 but was ignored and later retaliated against.

The federal government sought tax payments and penalties from Caterpillar under the “substance over form” and “assignment of income" judicial doctrines. Substance over form says taxpayers cannot avoid taxes on services or goods by assigning that income to another entity, and assignment of income allows the IRS to ignore an entity’s legal form and focus on its substance in order to prevent that entity from being used to avoid taxes.

Catepillar has denied any wrongdoing, and it continued to maintain its innocence in its September 8 SEC filing announcing the settlement.

“We vigorously contested the IRS’s application of the ‘substance-over-form’ or ‘assignment-of-income’ judicial doctrines and its proposed increases to tax and imposition of accuracy-related penalties. The settlement does not include any increases to tax in the United States based on those judicial doctrines and does not include any penalties. The settlement is within the total amount of gross unrecognized tax benefits for uncertain tax positions and enables us to avoid the costs and burdens of further disputes with the IRS.”

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The notice adds that Caterpillar remains subject to “the continuous examination” of its income tax returns by the IRS, “and tax years subsequent to 2016 are not yet under examination.”