Even social media giants can have tax trouble.

Facebook’s request to have its $7 billion tax case decided by the IRS Office of Appeals has been denied by a California judge, as reported by Forbes on May 16.

The IRS Office of Appeals is an independent office that serves as a way to resolve disputes outside of the courts. Facebook has been denied this alternative not once, but twice.

This does not mean that Facebook has lost its case.

Rather, it will see its day in the U.S. Tax Court… currently set for August 21, 2019.

What’s the Issue?

In 2010, Facebook shifted rights to its international business assets to Facebook Ireland. (Its United States and Canada business were not included in the transaction).

These assets included its user base, online platform and marketing tangibles.

Ernst & Young assigned a value of $5.8 billion to these assets.

The IRS contends that this value was too low, which led to Facebook paying lower taxes. They maintain the assets were worth $14 billion… more than double Ernst & Young’s valuation.

Based on their findings, the IRS has filed a notice of deficiency for the 2010 tax year. Not only that, the IRS will assess tax based on their valuation to the years after 2010 as well. This could equal a back tax bill of an estimated $5 million, plus penalties and interest, for the social media company.

For its part, Facebook has challenged the assessment by petitioning the court, as is their right… and that’s the matter that will be decided in tax court.

Facebook Changes its Revenue Reporting

On December 12, 2017, Facebook announced that it would begin booking advertising revenues in the country in which they were generated. Previously, those advertising revenues were booked with Facebook Ireland.

This followed a similar move in April 2016 involving the United Kingdom.

Facebook had been receiving criticism for paying only £4,327 ($6,643 in US dollars) in corporate taxes in 2014 – which was less than what their average UK employee paid in income tax, as reported by the BBC.

Why? Because Facebook was recording those revenues in Ireland, which has a much lower tax rate.

And again… at the time this was perfectly legal.

Under a firestorm of pressure, however, Facebook reversed course and moved its revenue from Ireland to the United Kingdom.

 

Facebook is Not Alone

In the past, tech giants Apple and Google also moved assets to Ireland in a so-called “double Irish” technique.

Because of these moves, the Europe Union, as well as Australia and the United Kingdom have explored – and in some cases, enacted – new requirements regarding taxing multinational corporations.

For example, Australia and the United Kingdom have a “Google tax.” This is a tax on profits that are moved offshore to countries with lower tax rates.

In July 2017, Reuters reported that the European Parliament passed a resolution that forced multinational corporations to report their tax and financial data by country, in all the nations in which they operate.

For Ireland’s sake, the laws that allowed for multinationals to work the system in a “double Irish” fashion were phased out in 2015. Companies that already had this structure at the time may continue benefiting from it until 2020.

Don’t Cry for Facebook

The social media giant is not in any danger of folding, even if the IRS case does not go their way.

Why? Because of their extremely healthy bottom line.

In 2017, the company realized revenues of $40.65 billion. And that’s a 47% increase over 2016.

Of course, it will hurt in the quarter (or over several quarters) that the IRS takes its bite (if it happens). But Facebook has outstanding revenue and net income to take it in stride.

Their 2017 net income – after amortization, depreciation, operating expenses, and taxes, among other line items –is still a cool $15.92 billion, which is a 56% increase over 2016’s $10.19 billion.

Top 3 Lessons Learned from Facebook’s Tax Trouble

So what can we – as non-billionaires – learn from all of this?

Here are three essential takeaways from this story.

Lesson #1 – There are always ways to legally reduce your tax bill

At issue with the Facebook case is not whether transferring assets to Ireland was legal. It was, at the time.

Instead, it was the valuation of those assets which is in question.

We’ll just have to see how this plays out.

Nevertheless, whether you have billions of dollars or a hundred, there is a way to (legally) reduce the taxes you owe. A good tax professional can help you find those ways.

Lesson #2 – Tax laws are complex… and ever-changing

When you do find that tax loophole, realize that you may not have it next year.

On the plus side, there may be some new law that can help you save.

For instance, the United States Tax Cuts and Jobs Acts could be a boon to Facebook, as it slashes the corporate tax rate from 35% to 21% in 2018. It also gave companies a break on returning foreign revenue.

So does it make sense for Facebook to make another move to take advantage of this? You can be sure there is a tax expert (or several) somewhere looking at this for them.

You see, there is no “set it and forget it” when it comes to taxes.

It’s a field that never sits still, which (conveniently) takes me to the next lesson…

Lesson #3 – You need a tax professional to help you navigate tax law

We know you are smart… that’s why you’re reading this!

The thing is, with everything you have to do (otherwise known as your life), do you really want to learn all of the nearly 80,000 pages of tax code and case law?

If you do, hats off to you!

By the way, that tax code is changed and added to all the time (see lesson #2).

Why waste the time and energy, and possibly make a mistake?

Paying a tax professional pays off in tax savings (and time, money and possible trouble with the IRS).

This goes double for those of you with tax troubles.

Don’t go it alone… seek out expert tax advice!

At SFS Tax Problem Solutions, we have over 35 years of experience of helping people just like you with tax problems.

Jeffrey Schneider, principal of SFS Tax, is an Enrolled Agent, a Certified Tax Resolution Specialist, and an NTPI Fellow.

As an EA, Schneider is a federally authorized and licensed tax practitioner who has achieved technical expertise in the field of taxation. EAs are also the only taxpayer representatives who receive the right to practice directly from the government.

Call (772) 337-1040 for a free consultation or set an appointment now.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for SFS Tax Problem Solutions.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.

The book is available in paperback and ebook on https://Amazon.com
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For more on SFS Tax & Accounting Services, visit http://sfstaxacct.com/
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