A California judge has dealt a blow to Facebook in its ongoing battle with the Internal Revenue Service (IRS), ruling that the social media giant does not have a right to move the matter to appeals. That means that Facebook's tax case - focusing on allegations that it failed to report and pay taxes on $7 billion in income overseas - will not be heard in front of the IRS Appeals board, but in the United States Tax Court.
First, some background. In November 2011, the IRS began an audit of Facebook's financials for 2008 and 2009. In January 2013, the IRS expanded the examination to include an additional year: 2010. According to court documents, Facebook produced thousands of pages of documents in response to more than 200 IRS requests. The audit largely targeted agreements between Facebook Inc. and Facebook Ireland transferring worldwide business rights to intangible assets said to be worth approximately $7 billion. At issue: the IRS was trying to determine whether Facebook’s outside accountants, identified in court documents as Ernst & Young, undervalued those assets.
On July 26, 2016, the IRS issued a Statutory Notice of Deficiency to Facebook. A Notice of Deficiency, sometimes called a 90-day letter, isn't a tax bill. Its purpose is to advise that the IRS intends to assess a tax deficiency. The notice also informs the taxpayer of the right to petition the Tax Court if the taxpayer doesn't agree with the changes.