Like This!


If you're like most Facebook users, you get plenty of friend requests from people who aren't really friends: co-workers from your last job, old classmates you haven’t spoken with in the last 30 years, or random strangers you spoke with only briefly at your in-laws' anniversary party… Fortunately, in most cases, you can just ignore those requests and hope they eventually go away.

Unfortunately, some requests can be more difficult to ignore. One particular example includes the friend request the IRS recently sent to Facebook itself – in the form of a Statutory Notice of Deficiency for $3 to 5 billion dollars. (Plus interest and penalties, of course.)

Here's the scoop: Facebook has 1.23 billion friends across the world – enough for Facebook to make $3.69 billion selling advertisements last year. Of course, no one likes paying tax on all that income at the corporate rate of 35%, so Facebook set out to edit its profile – at least where the IRS is concerned.

In 2010, Facebook transferred rights to its "user base, online platform and marketing intangibles" to an Irish subsidiary. The Emerald Isle is a lovely place to do business – especially considering Ireland's top corporate tax rate is just 12.5%, which is barely a third of our own. This decision allowed Facebook to license the intellectual property from its Irish subsidiary, deduct those license payments to save 35% here in the US, and pay just 12.5% on the resulting income in Ireland. Slick, right? Lots of companies have moved their intellectual property to Ireland, and, according to one study, this sort of profit shifting will cost the Treasury $135 billion in tax revenue this year. If you're counting, that's over 4% of our total tax receipts.

Facebook also contracted Ernst & Young, a global accounting firm, to assign a value to the assets that were transferred. That's important because the lower those assets are valued, the less taxable income Facebook has to bring back from the foreign subsidiary. At the same time, it's a difficult job because there's no real market for those particular assets. Who else besides Facebook could possibly use their marketing intangibles?

All of this activity caused enough interest that, in 2013, the IRS opened up an investigation. They saw that Ernst & Young valued each of the transferred assets independently, rather than as part of an integrated whole, and stated that this undervalued the assets by billions of dollars. In turn, the IRS sent Facebook a series of "friend requests" in the form of summonses to produce documents and appear at their office in San Jose. The IRS’ current position is that Facebook has “failed to comply” with all of their requests; however, Facebook’s response is that they have complied “with all applicable rules and regulations in the countries where we operate.”

With the statute of limitations for the audit closing in, the IRS sent them a final notice with nothing more than bill requesting the amount of tax they believe is rightfully due. Naturally, Facebook will fight back in court. If they lose, it could cost them enough that investors stop liking their stock! Only time will tell. And we’re sure that many of us across the world will be staying tuned to see the end of this story…