ProPublica, Who’s Afraid of the IRS? Not Facebook.:
The social media behemoth is about to face off with the tax agency in a rare trial to capture billions that the IRS thinks Facebook owes. But onerous budget cuts have hamstrung the agency’s ability to bring the case.
In March 2008, as Facebook was speeding toward 100 million users and emerging as the next big tech company, it announced an important hire. Sheryl Sandberg was leaving Google to become Facebook’s chief operating officer. CEO Mark Zuckerberg, then 23 years old, told The New York Times that Sandberg would take the young company “to the next level.”
Based on her time at Google, Sandberg soon decided that one area where Facebook was behind its peers was in its tax dodging. “My experience is that by not having a European center and running everything through the US, it is very costly in terms of taxes,” she wrote other executives in an April 2008 email, which hasn’t been previously reported. Facebook’s head of tax agreed, replying that the company needed to find “a low taxed jurisdiction to park profits.”
Later that year, Facebook named Dublin as its international headquarters, just as Google had done when Sandberg was there. And just like Google, Facebook concocted an intra-company deal to “park profits” in Ireland, where it would pay a tax rate near zero.
Like its Big Tech peers, Facebook wasn’t much afraid of the IRS. But, as it happened, the same year that Facebook started moving profits to Ireland, the IRS launched a team to crack down on deals like that. The effort started aggressively. As we recently reported, the IRS threw everything it had at Microsoft in the largest audit in the agency’s history.
But shortly after the IRS showed this new ambition, Republicans in Congress, after taking the House in 2010, began forcing cuts to the IRS’ budget. Over the years, as Facebook grew into one of the world’s largest companies, with 2 billion users, the IRS was shrinking. By the time the IRS finally took on Facebook over its Irish deal a few years later, the agency was in over its head.
ProPublica pieced together the story of the Facebook audit from court documents filed by the two sides in their yearslong battle. (Both the IRS and the company declined to comment.) The picture revealed by the documents provides a crucial window into the IRS’ struggles to check large corporations’ tax schemes.
At one point in the audit, the exam stalled for months because there was no money to hire an expert. Agents tried for five years to pick apart the deal’s complexities and were still scrambling when the statute of limitations expired in July 2016. Like a student forced, when the bell rings, to turn in a test with unanswered questions, the IRS sent Facebook the results of its incomplete audit. Based on the work it had done, the IRS thought Facebook had massively mispriced its Irish deal and should have paid billions more in taxes.
Today the fight continues before the U.S. Tax Court, and the conflict is about to reach a climax: A trial is scheduled for February, and the IRS is trying to convince a judge that it has a firm basis for its conclusions. For its part, Facebook has defended its actions in court filings, calling the IRS’ conclusions “arbitrary, capricious, or unreasonable.”
If the IRS prevails in court, it could cost Facebook up to $9 billion more in taxes, based on estimates in the company’s securities filings. It would be a notable defeat for a company that, when it comes to risky tax avoidance, has been more aggressive “than almost any other U.S. corporation,” said Matt Gardner, a senior fellow at the nonprofit Institute on Taxation and Economic Policy. According to Facebook’s public filings, from 2010 through 2017 (when the U.S. corporate tax rate was 35%), the company paid a total of $3.9 billion in taxes on $50 billion of pre-tax income, a rate of about 8%.
Still, the IRS hasn’t won a clear victory in a major profit-shifting case in court for decades, said Reuven Avi-Yonah, a professor at the University of Michigan Law School and an expert on international tax. The agency, he said, has simply been “overmatched.” Given how things have gone so far in its conflict with the IRS, Facebook has good reason to be confident about the coming trial. ...
It’s unclear just how much tax Facebook’s Irish deal has saved the company, because the company has also made other moves to reduce taxes. Since Facebook refuses to divulge details, back of the envelope calculations based on other company disclosures provide the best guess. On that basis, ProPublica estimates that Facebook shifted at least $19 billion in profits offshore.
If the company’s big tax dodge were upended, Facebook could be forced to pay up to $9 billion more in taxes, the company recently said, an increase from its earlier estimates of up to $5 billion before the IRS changed its demand. But despite the increased exposure, Facebook’s chances in Tax Court are good. A win would be just another windfall for a company that’s clearly reached “the next level.”