Facebook faces IRS scrutiny as Justice Department files lawsuit

A Department of Justice lawsuit filed this week seeks to force Facebook's hand in a battle against the IRS and the allegations it has made about Facebook's tax records. According to the IRS, the social network may have skirted paying taxes on billions of dollars by understating the value of some of its IP that was transferred to Ireland. The DoJ's lawsuit, which was filed this past Wednesday in California, aims to make Facebook turn over documents as part of the tax investigation.

According to Reuters, the IRS is looking into whether Facebook sold off some IP rights to a subsidiary in Ireland for too low of a price, something that would have been understating its U.S. income. Assuming the allegations are true, this would mean Facebook pushed taxable profits off to Ireland where the tax rate is lower than what it would be taxed in the U.S.

According to the lawsuit, "The IRS examination team's preliminary positions suggested that the E&Y [Ernst & Young tax adviser] valuations of the transferred intangibles were understated by billions of dollars."

In a statement, a Facebook spokesperson denied the allegations, saying, "Facebook complies with all applicable rules and regulations in the countries where we operate."

The issue is a messy one, and not exclusive to Facebook — many companies have been accused over the years of using tax loopholes, carefully structured subsidiaries, and other methods to decrease the amount of corporate tax they pay. The reality has prompted critics to demand changes to US tax laws that would deal with these so-called loopholes and other issues, forcing companies to pay more taxes domestically.

SOURCE: Reuters