Many taxpayers routinely express shock and horror regarding their perceptions of our tax system. They may hold beliefs like, “Why should I pay taxes when major corporations can arrange their finances to owe nothing in taxes?” Others may rail against a tax system that they believe is unfair and does not represent their best interests. While these are valid views to hold, taxpayers must understand that they still have an obligation to file and pay taxes. Taxpayers who decide that they will not file or pay taxes frequently soon face IRS investigations, tax audits, and other tax enforcement action. They may even face criminal tax prosecution by the Department of Justice.
However, taxpayers who cite the behavior of companies, like California-based Facebook, and regulator’s response to these actions as a reason why they do not pay taxes, should think again. The IRS has been engaged in an admittedly slow-developing inquiry into the company’s tax practices and now appears ready to make the company respond to the agency’s concerns. If the IRS is able to build a case against Facebook and its army of lawyers and accountants, it can surely pursue individual taxpayers and small businesses for other forms of tax noncompliance.
Judge Says Facebook Must Explain Snub of Seven IRS Summonses and Tax Practices
In late July 2016, representatives from Facebook failed to appear after receiving the seventh summons from the IRS. The IRS was seeking information from the company regarding its internal corporate records on one of its offshore tax strategies. Essentially, at issue is Facebook’s tax practices and federal income tax liability for the period ending Dec. 31, 2010. The IRS is seeking information to ascertain whether the company undervalued the global rights for many of its intellectual properties and other intangible assets outside the U.S. and Canada. These assets were subsequently transferred to a Facebook subsidiary in low-tax Ireland.
A new legal filing by the IRS claims that the company has ignored seven summonses sent to assess these practices. Following the non-responsiveness by Facebook at the end of July, the IRS apparently filed suit against the company. The suit alleges that Facebook illegitimately reduced its taxes by undervaluing its intellectual property.
Facebook attempted to save on U.S. taxes by transferring its intellectual property to an Irish subsidiary. The corporate tax rate in Ireland is just 12.5 percent versus 35 percent in the United States. Essentially, Facebook’s IP was transferred to Facebook Ireland Holdings. The IRS alleges that this transfer may have been undervalued by the companies by billions. If so, the company could owe significant back taxes, penalties, and interest stretching back to the 2010 transaction.
If the IRS Can Pursue Facebook, It Can Pursue Your Business
The simple fact of the matter is that the investigators and auditors employed at the IRS are extremely experienced and sophisticated. If they can unravel a complex international tax plan and build a case against Facebook, the IRS can surely take similar action against California companies that conceal income, fail to satisfy payroll tax obligations, and engage in other tax mistakes or tax fraud.
Furthermore, if your business lands on the IRS’s radar, the federal tax agency works closely with state tax enforcement agencies such as the California Franchise Tax Board (FTB), California Board of Equalization (BOE), and the California Employment Development Division (EDD). If the IRS suspects tax fraud or other improprieties, agents have been known to inform state regulators. This means the businesses that attract IRS attention often face subsequent state tax enforcement actions.
Business owners who face enforcement actions in California are often shocked at the level of aggressiveness employed by the California EDD and BOE regarding payroll taxes and sales and use taxes, respectively. Some business owners have described the process as harrowing and feel that they are treated as criminals until he or she can prove that the tax obligations were actually satisfied. An experienced tax attorney is often essential to resolving matters of this type and can reduce the likelihood that an audit goes “off the rails” and results in a full inquiry into your company’s finances.
Work with Strategic Sacramento California Tax Attorneys
The tax lawyers at NewPoint Law Group, LLP are proud to help Californians and California businesses comply with all state and federal tax obligations. If you or your business faces an IRS or California tax audit, we can prepare strategically and work to minimize the disruption to your business, and the potential consequences of the inquiry. To schedule a confidential tax consultation at our Roseville or Folsom, California law offices, call 800-358-0305 or contact us online today.