Caterpillar Accused of Billions in Possible Federal Tax Fraud

By - March 8, 2017
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A report recently commissioned by the US government and was recently reviewed by the New York Times has accused Caterpillar of carrying out possibly billions in tax and accounting fraud. While it is very rare for the US government to accuse a major multinational corporation of federal tax fraud, it could result in large penalties and be a major blow to the Caterpillar name.

For several years, federal investigators at the Department of Justice and the Internal Revenue Service have been looking closely at the heavy equipment manufacturer’s overseas tax affairs and had never fully understand its complex financial transactions that involved billions of dollars in a Swiss subsidiary.

The report was compiled by Leslie Robinson, an accounting professor at the Tuck School of Business at Dartmouth College and the author of the report. She noted in the report’s introduction that Caterpillar allegedly did not fully comply with US tax laws and/or US financial reporting rules.

Robinson noted that she thinks the noncompliance alleged by the company was intentional and was mostly with the idea of keeping the share price of Caterpillar as high as possible. She stated as well that she believes the acts were fraudulent and not negligent.

Federal charges have not yet been filed in the case. It is not clear if federal investigators agree with the findings or if they are going to act upon them.

The report has not been made public yet and it has not been given to Caterpillar yet. The report outlines what is termed a deceptive strategy for bringing back billions of dollars to the US from offshore accounts while not paying federal income taxes on the earnings.

A Caterpillar spokeswoman, Corrie Heck Scott, stated that the company had not yet gotten a copy of the report and would not make public comment at this time. The heavy construction and mining equipment company has staunchly defended its tax strategies in the past and called the arrangements it has made to be financially prudent and complying with federal law.

The report indicates that the company’s tax strategies may have saved it billions of dollars that may have been needed to be paid in taxes. In early March 2017, federal agents from DOJ raided three buildings owned by Caterpillar in Peoria, Illinois as part of the ongoing federal investigation. Caterpillar has stated publicly that it is fully cooperating with law enforcement.

The New York Times reports that the company’s tax practices have long been a focus of federal investigators. This goes back to 2014 when a Senate hearing determined that the company was able to slash its tax bill by $2.5 billion over more than a decade. It did so by transferring earnings out of the US into a Swiss company that it also owns. The company did this despite the fact that an internal audit warned that the strategy did not have a clear business purpose and could be construed as tax avoidance.

In 2015, Caterpillar reported that it had gotten a subpoena from federal agents demanding documents and information related to the cash movements among its subsidiaries. It also wanted documents regarding other financial transactions that involved its foreign subsidiaries.

The company disclosed in 2016 that the IRS is seeking more than $2 billion in income taxes and penalties on profits that were earned by the Swiss company. Caterpillar has stated that it is fighting the IRS increases on taxes owed.

Robinson has declined to comment further on her report. The document focuses on a specific aspect of the offshore tax strategy by Caterpillar. The document concluded that the firm did not pay taxes on billions of dollars that it brought back to the US mostly from its Swiss subsidiary. It also claims that the company has not complied with US tax law and financial reporting rules.

It is unknown which federal agency brought in Dr. Robinson to probe Caterpillar. The report states that she was requested to provide her written professional opinion of the company’s financial reporting related to a number of tax accounting standards, related to an investigation by the FDIC Office of the Inspector General.

Shares of Caterpillar stock dropped two percent on news that the company may have committed tax fraud.

Tax evasion or tax fraud is a very serious federal offense, if it is proven. Tax evasion by a company refers to any willful attempt to avoid the payment of federal taxes. This can including falsifying documents or avoiding various reporting requirements. Experts think that hundreds of millions of dollars in federal taxes are not paid every year. It is thought that most of this is due to income that the IRS does not have the ability to completely track.

International cooperation has grown in recent years to prevent companies in countries around the world from engaging in tax evasion. Some tax evasion occurs at the state level, but most occurs at the federal level.