The Internal Revenue Service has delivered a Notice of Deficiency to Facebook for $3-5 billion as reported by Bloomberg.
A Notice of Deficiency (or CP3219A Notice) is a document from the IRS stating that they've received information that differs from your tax paperwork. It explains that you've either paid too much or too little tax as well as how the difference was calculated. You can sign a form agreeing to the changes and pay the difference you may owe. Alternatively, you can challenge the differences in tax calculations in U.S. Tax Court.
The Notice of Deficiency was delivered to Facebook on Wednesday. Facebook detailed the contents of the notice in a regulatory filing on Thursday. The IRS claims that their tax advisor Ernst & Young LLP undervalued the property of the company in 2010 prior to the transferring of licenses and holdings to Facebook Ireland Holdings LLC.
The dispute in the company's valuation is centered around the different parts of Facebook. The Internal Revenue Service states that Ernst & Young LLP calculated the value of the company's assets individually. However, documentation and statements from Facebook employees stated that the assets were intertwined in such a fashion that they couldn't work without one another. This interdependency would affect the overall value of the different assets.
The Internal Revenue Service has requested documents relating to the company's movement over to Ireland. Facebook failed to appear in the tax agency's offices in San Jose, California on June 17 and June 29. The statute of limitations on the discrepancy was going to expire soon; the Notice of Deficiency effectively stalls that clock and gives the government one last chance to collect the money that they feel the social media giant owes them.
Nearly half of the company's overall revenue is sourced from overseas operations; the remaining half comes from the United States and Canada. If they lose this court battle, Facebook believes that a judgement in the amount of $3-5 billion "could have a material adverse impact" on their finances. They further stated that determining the value of these assets is a process that requires the input of multiple layers of management and that their ultimate determination of value can still be "uncertain".
What do you think of the IRS's actions in this case? Do you feel that Facebook owes the government the money that the IRS is claiming? How do you feel about companies that relocate their operations overseas for tax reasons? Let us know in the comments below!