At issue is the way Facebook moved assets to Ireland
Photograph by Justin Sullivan — Getty Images

The company says it will challenge the IRS in court.

By Sy Mukherjee
July 29, 2016

This post has been updated to include a statement from Facebook.

Facebook might be on the hook to Uncle Sam for as much as $5 billion in taxes.

The company said it received a “statutory notice of deficiency” from the IRS in a Securities and Exchange Commission filing on Thursday. The notice only applies to the 2010 tax year, but as Facebook fb noted, the agency may extend its scrutiny to other tax years and balloon the tech giant’s federal income tax bill by $3 billion to $5 billion, plus interest and penalties.

“We do not agree with the position of the IRS and will file a petition in the United States Tax Court challenging the Notice,” wrote Facebook in its filing. “If the IRS prevails … 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 IRS’s examination centers on the way Facebook shifted assets to its Facebook Ireland subsidiary. Regulators claim that Ernst & Young, the accounting firm Facebook hired to evaluate the assets being moved, may have used methodology which undervalued the transfers.

Parking profits and intellectual property abroad in order to avoid America’s nominal 35% corporate tax rate is a common practice among U.S. firms. A Reed College study from May estimated that American companies will avoid up to $135 billion in corporate taxes this year via profit-shifting.

 

The dispute between Facebook and the federal government has heated up in recent weeks. The Department of Justice sued the company earlier this month to force Facebook to turn over documents related to the IRS investigation. Facebook has consistently declined to provide many of these documents, according to federal officials.

“Facebook failed to appear on June 29, 2016, the date scheduled for compliance with the seventh summons, and did not produce the books, records, papers, and other data demanded,” wrote the IRS in its amended complaint earlier this week. “Facebook’s failure to comply with the seventh summons continues to this date.”

“Facebook complies with all applicable rules and regulations in the countries where we operate,” a Facebook spokesperson told Fortune when asked for comment on the merits of the IRS’ notice. The IRS declined to comment.

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