Intel Tax Returns Facing IRS Scrutiny, Firm Says

The Internal Revenue Service has begun auditing Intel Corp.’s tax returns for 2001 and 2002, the chip-making giant said in a regulatory filing Monday.

The Santa Clara, Calif.-based company, whose shares were off more than 3% on Nasdaq in the wake of the news, said it believed that the outcome of the audit, which got underway last month, would not have a material adverse effect on its finances.

Such audits are not unusual, said Intel spokesman Chuck Mulloy.

In trading Monday, Intel shares fell $1 to $29.

In its filing to the Securities and Exchange Commission, Intel said the IRS examined its 1999 and 2000 tax returns in 2001 and in August suggested adjustments to its tax benefit for export sales, in effect proposing an increase in Intel’s tax liability by $600 million.

Intel, which noted that the IRS could make similar claims for subsequent years, is contesting the proposal.

The dispute centers on a tax credit that is intended to encourage the manufacturing of products in the U.S. for export to other countries. The bulk of Intel’s chip fabrication facilities are in the U.S., but the chips are sent overseas for assembly and testing.

IRS officials maintain that the work that takes place overseas constitutes manufacturing and makes Intel ineligible for the credit.

The company reported income taxes of $1.8 billion in 2003.

The world’s largest microprocessor company also said Monday that stock options would have cut 2003 net income by $991 million, or nearly 18%. Intel has opposed any accounting change to treat employee stock options as an expense.

Instead of earnings per share of 85 cents, Intel would have earned 71 cents per share, it said in the SEC filing.

Intel said it expected to spend $3.6 billion to $4 billion on chip-making equipment and other investments in 2004. The midpoint of its 2004 spending range is $3.8 billion, slightly higher than its $3.7 billion in capital spending in 2003.