Facebook May Have ‘Understated’ 2010 Royalty Income by ‘Billions of Dollars,’ Says IRS

DOJ’s Tax Division went to federal court Wednesday seeking an order forcing Facebook to comply with six IRS summonses for documents in the agency’s investigation of the company’s tax liabilities for the 2010 tax year, two years before Facebook went public. Facebook has refused to turn over “the books, records, papers, and other data demanded in the summonses” about the company’s September 2010 transfer to Facebook Ireland of rights for its businesses outside the U.S. and Canada, said the DOJ petition (in Pacer) filed in U.S. District Court in San Francisco. Facebook’s 2010 tax return “reported royalty income that I learned came from transfers of intangible property” to Facebook Ireland, said a signed declaration (in Pacer) from Nina Wu Stone, the IRS agent in charge of the investigation. The “preliminary” findings of an IRS “examination team” of outside tax experts “suggested” that Facebook’s “valuations of the transferred intangibles” may have been “understated by billions of dollars,” her declaration said. “Facebook complies with all applicable rules and regulations in the countries where we operate,” a company spokeswoman emailed us Thursday. Facebook acknowledged in recent SEC filing disclosures that it was “under examination” by the IRS for the 2008-2010 tax years. “We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, and we do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years,” Facebook said in January in its most recent 10-K filing at the SEC.