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Facebook has formally informed its investors that it could be on the hook for billions more in back taxes if the Internal Revenue Service’s legal efforts are successful.
This notice comes weeks after federal investigators asked a judge in California to force Facebook to open up its financial and business records for 2010—the year that the social networking giant established a subsidiary in Ireland largely for tax reasons.
Facebook and many other tech firms have recently come under increased scrutiny for using this method to drastically—and legally—reduce tax burdens.
The “Double Irish” technique was phased out in early 2015, but companies already using it have until 2020 to transition to something else.
Government investigators accuse Facebook of possibly not charging its Irish subsidiary enough to license its own technology, which has the effect of substantially lowering its tax obligations.
In a Thursday filing with the Securities and Exchange Commission, the company wrote:
On July 27, 2016, we received a Statutory Notice of Deficiency (Notice) from the IRS relating to transfer pricing with our foreign subsidiaries in conjunction with the examination of the 2010 tax year. While the Notice applies only to the 2010 tax year, the IRS states that it will also apply its position for tax years subsequent to 2010, which, if the IRS prevails in its position, could result in an additional federal tax liability of an estimated aggregate amount of approximately $3.0 – $5.0 billion, plus interest and any penalties asserted. We do not agree with the position of the IRS and will file a petition in the United States Tax Court challenging the Notice.
If the IRS prevails in the assessment of additional tax due based on its position, the assessed tax, interest and penalties, if any, could have a material adverse impact on our financial position, results of operations or cash flows.
The Notice came two days after the IRS filed an amended petition with the federal court in San Francisco, noting primarily that Facebook failed to appear (for the seventh time) on June 29 at an IRS office in nearby San Jose, California.
Previously, Facebook has claimed that it complies with all “applicable rules and regulations.”