Caterpillar Inc., the Peoria, IL earth-moving equipment maker, is currently under investigation by the Internal Revenue Service (IRS) due to a belief that Caterpillar conducted tax evasion. In March 2017, the IRS conducted a raid on Caterpillar Headquarters to find evidence of Caterpillar failing to submit paperwork tied to its earnings. The IRS believes Caterpillar tried to depress its tax liability in the U.S. by as much as $2 billion by assigning its profits accrued in Europe to a Swiss subsidiary (Smith, 2017). The investigation was spurred by a University of Dartmouth professor's report that concludes Caterpillar conducted tax and accounting fraud. In early 2014 a U.S. Senate investigative committee concluded Caterpillar had avoided U.S. taxes on more than $8 billion dollars in revenue following a whistle blower's tip (Smith, 2017).

Caterpillar's office in Geneva, Switzerland sells replacement parts for the company's machines. Traditionally when the profits from those sales were returned to the U.S., Caterpillar paid a 30% tariff. To get around that tax payment, Caterpillar reorganized its Geneva section into Caterpillar Societe a Responsabilitie LLC and then allocated 85% of its Geneva profits to this entity. Once those earnings passed through the new LLC, the resultant income taxes went through Swiss tax authorities at a rate between four and six percent. Since parts were not "sold" from Caterpillar's U.S. distributors and instead sold by the LLC in Geneva, Caterpillar was able to avoid U.S. taxes on paper at least. I say at least because where Caterpillar went wrong is it continued to sell parts from its distributor in the U.S., where the bulk of its employees and systems existed. In the end Caterpillar reported on its taxed income from the Geneva based LLC and kept its actual overall income from the sale of replacement parts on a non-public ledger.

The investigation into Caterpillar is still on going, but when the IRS makes a final decision and determines the collectible amount from Caterpillar, the whistleblower is set to make approximately $300-$600 million. With the fervor of President Trump's stance on lower taxes for international sales, its hard to say when and if a criminal investigation by the government will be complete, albeit the IRS will still claim Caterpillar owes $2 billion.

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