On April 3, 2023, Judge Paige Marvel of the U.S. Tax Court issued its opinion in Fahy v. Commissioner, 160 T.C. No. 6 (2023) where he held that the IRS was without the authority to assess the Form 5471 imposed by Internal Revenue Code Section 6038(b). The Farhy case involved the penalties for failure to timely file Forms 5471 (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”).
The IRS was correct on the substance of the applicable law (i.e., that the taxpayer owed the penalties in question).
The IRS Had Followed Proper Procedure In Attempting
To Assess And Collect Those Penalties By Levy.
The IRS maintained, as it has for several years, that it has statutory authority to systematically levy penalties for failure to file some international information returns without
- Having to pursue civil litigation to collect the penalties or
- providing deficiency procedures that otherwise allows taxpayers, before making a payment, to contest the penalties before the Tax Court.
While this taxpayer victory may appear to be a panacea for anyone who has ever paid a penalty for the late filing (or failure to file) of a Form 5471, it may represent a real opportunity for taxpayers whose claims for a “reasonable cause” exception to the penalty for failing to timely file international information returns were summarily rejected by the IRS.
Although the opinion doesn’t explicitly address penalties for Forms 5472 or 8938, those penalties are both imposed under the authority of Internal Revenue Code Section 6038(b). Therefore, the IRS will have similar problems with assessing penalties for those forms.
The penalties for failure to file Form 3520 with respect to gifts from foreign persons are not imposed under Internal Revenue Code Section 6038(b). However, the Tax Court’s logic in deciding that Form 5471 penalties cannot be assessed applies equally with respect to the penalties for not filing 3520.
The implications of the Farhy case are uncertain but could be far-reaching, it is potentially applicable to numerous other penalties for failure to file international information returns that the IRS has systematically assessed following the same procedures it followed in Farhy.
The associated issues that need to be considered are:
- The complete list of information returns for which the IRS may have improperly assessed penalties in the past;
- The running of the statute of limitations with respect to penalty refund claims;
- Whether the IRS is legally obligated to refund any improperly assessed and collected penalties upon receipt of a properly filed refund claim;
- The proper procedure for claiming a refund for penalties that were improperly assessed and collected in the past;
- The likelihood that the IRS would prevail on appeal of the Tax Court’s decision in Farhy;
- Whether the IRS will proceed with civil litigation to recover the penalties; and
- What happens if IRS heads to Congress to get Congress to overrule the Tax Court decision.
- Given the partisan nature of taxes it is anyone’s guess if a bill of this nature would pass any time soon.
- If Congress changes the statute will the change, be retroactive?
Read more at: Tax Times blog