Microsoft owes the US Treasury $28.9 billion (£23bn) in back taxes, plus penalties and interest according to the Internal Revenue Service (IRS).
The figure, which Microsoft disputes, stems from a long-running IRS investigation into how Microsoft allocated its profits among countries and jurisdictions in the years 2004 to 2013, according to a securities filing
Critics of the practice, known as transfer pricing, argue that companies frequently use it to minimise their tax burden by reporting lower profits in high-tax countries and higher profits in lower-tax jurisdictions.
Microsoft, which is based in Redmond, Washington, said it followed IRS rules and will appeal the decision within the agency, a process expected to take several years.
The company said it has since changed its practices so that “issues raised by the IRS are relevant to the past but not to our current practices,” according to a Microsoft blog.
Microsoft said it believes that any taxes owed after the audit would be reduced by up to $10 billion (£8bn) based on tax laws passed by Donald Trump.
Microsoft shares dropped slightly in aftermarket trading, falling $1.42 (£1.15) to $331 (£269).