The U.S. Internal Revenue Service is auditing how Google Inc.avoided federal income taxes by shifting profit into offshoresubsidiaries, according to a person with knowledge of thematter.

The agency is bringing more than typical scrutiny to how thecompany valued software rights and other intellectual property itlicensed abroad, said the person, who requested anonymity becausethe audit isn't public. The IRS has requested information fromGoogle about its offshore deals after three acquisitions, includingits $1.65 billion purchase of YouTube, the person said. Thetransfer overseas of these kinds of rights rights has enabledGoogle to attribute earnings to foreign units that pay lower taxes,Bloomberg News reported a year ago.

While Google's potential liability isn't clear, similar dealsbetween companies and offshore arms are often the subject ofdisputes over hundreds of millions of dollars in taxes, said DanielFrisch, an economist at Horst Frisch Inc., which advises businesseson transfer pricing — the allocation of income between units indifferent countries. In 2006, the IRS settled a case with drugmakerGlaxoSmithKline Plc for $3.4 billion.

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