Apple's Offshore Accounting Comes Up Against the SEC, Congress and the IRS

NEW YORK (TheStreet) -- The Securities and Exchange Commission is serious about going after Apple's (AAPL) off-shore cash.

In a letter of comment to Apple's in-house counsel, SEC accounting branch chief Kathleen Collins challenged the company's aggressive accounting policies. Apple has about $16 billion of offshore cash exempt from taxation by the Internal Revenue Service.

The letter questions Apple's stated plans for the use of its rapidly growing offshore cash holdings:

Your financial statements indicate that you provide for any related tax liability on cash that may be repatriated. Please explain to us how the phrase may be repatriated should be interpreted in this context. We note that Tim Cook, the company's chief executive officer, stated in testimony before the Permanent Subcommittee on Investigations of the U.S. Senate on May 21, 2013, that you have no plans to repatriate these earnings at the current tax rate.

Tax avoidance has been under investigation by a Senate subcommittee chaired by Sen. Carl Levin of Michigan. In February he said that the loopholes used by some of the largest U.S. tech companies are "one significant cause of the [federal] budget deficit."

The subcommittee may push Congress to make changes to the U.S. tax code that could enable the IRS to get its hands on some of Apple's non-taxed cash.

Apple  is aware of the risks to this huge offshore nest egg. The company stated in its last SEC 10Q filing:

In the event that the company determines all or part of the net deferred tax assets are not realizable in the future, the company will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made....

The foreign provision for income taxes is based on foreign pretax earnings of $36.8 billion, $24.0 billion and $13.0 billion in 2012, 2011 and 2010, respectively. The company's consolidated financial statements provide for any related tax liability on amounts that may be repatriated, aside from undistributed earnings of certain of the company's foreign subsidiaries that are intended to be indefinitely reinvested in operations outside the U.S....

As of Sept. 29, 2012, U.S. income taxes have not been provided on a cumulative total of $40.4 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $13.8 billion.

Any deviation from more stringent accounting interpretations about the "true intentions" of companies employing offshore tax haven strategies might cross the lines if they are redrawn by SEC Chairman Mary Joe White and Congress.

"I think financial-statement fraud, accounting fraud has always been important to the SEC," White said in an interview in July of last year. "It's certainly an area that I'm interested in and you're going to see more targeted resources in that area going forward."

Not a happy prospect for Apple's shareholders if the SEC and Congress actually even the playing field. This is true as well for other players without Apple's clout. Every company would prefer to keep the taxman from grabbing a share of profits, especially those held offshore.

Finally, here's Apple's free cash flow as reported in December 2013.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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