Facebook under Investigation by IRS over Asset Transfer to Irish Subsidiary

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The U.S. International Revenue Service (IRS) is conducting an investigation Facebook Inc (NASDAQ:FB) in connection with the transfer of its assets to its subsidiary in Ireland.

The IRS wants to determine whether the social network giant’s understated the value if its assets as part of its complex strategy to reduce its tax payment.

The Department of Justice filed a petition in the federal court of San Francisco to seeking to enforce the summonses of the IRs served on Facebook and to force the social network to provide various documents as part of the investigation.

Facebook  valuation of assets was “problematic”

The IRS is examining Facebook’s tax liability in 2010 when the social network giant transferred the rights of its worldwide business excluding Canada and the United States to its Irish subsidiary.

The IRS noted that the social network giant transferred certain hard to quantify assets including its user base, online platform, and marketing intangible to Facebook Ireland Holdings Unlimited.

Ernst & Young, an accounting firm, was hired by the social network giant to value the assets for tax purposes, but the IRS suggested that the valuation approach was “problematic” based on the information obtained by the government tax collection agency.

The IRS believed that Ernst & Young may have “understated” the value of the intangible assets by “billions of dollars, according to CNNMoney based on the legal filing.

For years, the IRS has been trying to obtain information on the 2010 agreement, but Facebook’s cooperation was limited.

Limited cooperation

Nina Wu Stone, an investigator at the agency stated in the filing that she issued six summonses to Facebook last month. She asked the social network giant to provide records related to the asset transfer, but failed to comply.

In a statement, a spokesperson for Facebook said the company “complies with all applicable rules and regulations in the countries where we operate.”

The DOJ filed a court petition on the matter because the statute of limitation is set to expire on July 31.

“Even if the court acts quickly and Facebook produces the information immediately, it is unlikely the IRS will be able to analyze it by July 31Either Facebook will need to agree to extend the statute of limitations or the IRS will likely propose a very large audit adjustment,” ,” commented  J. Richard Harvey Jr., a law professor at Villanova.