Appeals Court Overturns Farhy & Finds IRS Does Have the Power to Assess Information Return Penalties!!!

According the Law360, the D.C. Circuit on May 3, 2024 overturned Farhy v. Commissioner, 160 T.C. No. 6 (2023), which held that the IRS was without the authority to assess the Form 5471 imposed by Internal Revenue Code Section 6038(b). 

Now a three-judge appellate panel found that the Tax Court had wrongly stripped the agency of its power to automatically assess $500,000 in penalties against businessman Alon Farhy, who for eight years failed to report his ownership of Belizean corporations as required by Internal Revenue Code Section 6038(a).

The Tax Court held that the IRS could only collect these penalties through a civil suit filed by the U.S. Department of Justice, not through administrative collection methods. However, the United States Court of Appeals for the District of Columbia Circuit disagreed with the Tax Court’s interpretation. 

The Appellate Court Held That The Text, Structure,
And Function Of Section 6038 Demonstrate That
Congress Authorized The Assessment Of Penalties
Imposed Under Subsection (B).

Congress clearly meant for the reporting violation penalties to be assessable through the IRS' administrative process when lawmakers created them in 1982 under IRC Section 6038(b), the panel said in an opinion authored by Circuit Judge Cornelia T.L. Pillard. 

The court then turned to the long established Reenactment Doctrine and went on to say “It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.’” ... Since adding subsection (b) in 1982, Congress has amended section 6038 seven times; each time, it has left undisturbed the IRS’s practice of assessing and administratively collecting penalties imposed under section 6038(b). 

The ruling overturned an the April 2023 decision by Tax Court Senior Judge L. Paige Marvel, who found the law didn't explicitly give the agency the collection power. 

"If subsection (b) penalties are that hard to recover, they may not be worth the candle," Judge Pillard said in the opinion. "It would be 'highly anomalous' for Congress to have responded to the identified problem of the underuse of subsection (c) penalties by promulgating a penalty that, while simpler to calculate, is much harder to enforce."

What's more, the panel said, is that Congress spelled out that the new subsection (b) penalty was meant to coordinate with the existing process for enforcement using tax credits in subsection (c), which everyone, including Farhy, agrees are assessable by the IRS administrative process. Splitting the review of penalties springing from the same violation would have "anomalous implications," Judge Pillard said in the opinion.

"Farhy's reading would create parallel and substantively overlapping judicial tracks for determination of twinned penalties for the same noncompliance: federal district court for the subsection (b) penalties, and Tax Court for the subsection (c) penalties," Judge Pillard said.

"We Decline To Adopt A Reading Of Section 6038(B) That Attributes To Congress The Intent To Respond To The 

Problem It Identifies In A Manner That Is Not Only 

Ineffective, But Counterproductive," Judge Pillard Said.

Farhy interpreted the law to mean that a penalty must be explicitly characterized as a tax or designated as assessable through IRS administrative processes elsewhere in the tax code for the government to assess it under IRC Section 6201(a).

The government said the law "covered the waterfront" and a narrower interpretation would result in "absurdities," according to the appellate opinion.

Need To Successfully Contest Form 5471,
5472, 8938, & 3520 Late Filing Penalties?

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Read more at: Tax Times blog