Last week the IRS raided Caterpillar's Peoria Illinois headquarters over alleged failures to follow compliance rules involving cross-border transactions between it and it's various subsidiaries. Here is what you need to know.

The raid was conducted by the Internal Revenue Service, the Federal Deposit Insurance Corp. and the Commerce Department’s Bureau of Industry and Security Export Enforcement. In addition to hitting the company's headquarters in Peoria federal regulators also raided a facility in Morton that ships parts overseas. 

The investigation is focused on, among other things, financial information on U.S. and non-U.S. Caterpillar subsidiaries that include undistributed profits of non-U.S. subsidiaries as well as the movement of cash among U.S. and non-U.S. subsidiaries. Please note that this is a criminal investigation. In addition, the investigation involves a FATCA component - as Caterpillar has also allegedly taken advantage of undisclosed accounts abroad to pay a tax rate of four to six percent - or nearly thirty points below the actual corporate tax rate.

Needless to say it falls upon accounts payable, tax, and treasury professionals to make sure that they are meeting IRS due diligence compliance and reporting rules. In particular, you need to be extra careful in regards to payments that extend the 1099/1042-S universe to those cross-border transactions that occur within even subsidiaries of your organization. We have been saying for years that this is a focus of IRS enforcement, and Caterpillar is learning that the hard way.