IRS Inquiry Focuses on Foreign Firms' U.S. Companies : Taxes: Audits into suspected 'underpayments' have been in the works for years. The amount in question could run as high as $12 billion.


The Internal Revenue Service confirmed Sunday that it has been auditing American subsidiaries of foreign-owned companies to see whether they have been underpaying their corporate income taxes.

IRS officials estimated that the cases they now have in progress suggest that suspected "underpayments" by such firms over the past several years could amount to as much as $12 billion. However, many of the cases are still in negotiation and may not yield that much.

The suspicion stems from the fact that although foreign investment here has tripled during the past decade and foreign firms are now earning substantially more than they did before, the amount they are paying in U.S. taxes has remained almost unchanged.

IRS officials confirmed Sunday that data compiled by the agency indicates that of about 36,800 foreign-owned companies that filed U.S. tax returns in 1986, more than half reported they had no taxable income.

Although authorities say the cases often are a matter of judgment, there is suspicion that some foreign-owned subsidiaries in this country have successfully reduced their tax liability by "overpaying" for the parts or technology they import, thus cutting back the income they report here.

Charles S. Triplett, deputy associate chief counsel of the IRS, said the auditing, which was reported Sunday by the New York Times, was begun in the early 1980s and was intensified during the last half of the decade when foreign firms' presence in the United States increased.

"We stepped it up four years ago--it's not exactly a hot flash," he said in a telephone interview.

Triplett said that contrary to some reports, the probe was not being concentrated on Japanese companies. But he said it is possible that more Japanese-owned firms ultimately may be challenged because they tend to import from parent firms rather than buy their parts here.

"We are not picking on any particular country," Triplett said. "We also have a lot of Canadian and West German cases, but they don't seem to make the news flashes."

The disclosure follows a study last year by the congressional Joint Committee on Taxation that suggested there was "some indication that the level of tax payments of foreign-owned businesses in the United States is unusually low."

Triplett said the agency's efforts could be bolstered in future audits by a 1989 law that enables the IRS to fine foreign-owned companies up to $10,000 a month if they do not comply promptly with demands for records or testimony, and then eventually assess extra taxes. But he said the law does not apply to records for tax years before it was enacted and so is of little help in the audits that the IRS currently is performing, which primarily involve the behavior of corporations during the early 1980s.

IRS officials said the new law was enacted to reinforce a 1987 ruling by a federal district court in Los Angeles that empowered IRS officials to subpoena the records of a U.S. subsidiary of a foreign firm. That case involved Toyota, U.S.A., the auto importer.

Triplett said the IRS frequently finds a reverse pattern when U.S. subsidiaries move to foreign tax havens. In those cases, he said, they sometimes allocate too much of their incomes to their foreign operations, thus reducing the amount they must pay to Uncle Sam.

Triplett cautioned, however, that in many such instances the allocation of income between one country and another is a matter of judgment and eventually is determined by negotiation between the IRS and the corporation involved.

"They're not out of compliance necessarily," he said.

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