On May 3, 2024, the U.S. Court of Appeals for the D.C. Circuit overturned a U.S. Tax Court ruling in the case of聽Alon Farhy v. Commissioner1聽that had previously concluded the聽U.S. Internal Revenue Service (IRS) lacked the statutory authority to assess penalties for failure to file Form 5471,聽Information Return of U.S. Persons With Respect to Certain Foreign Corporations. 聽This form is required for reporting a U.S. person鈥檚 interests in certain foreign holdings. 聽The reversal means that taxpayers who fail to report foreign holdings will continue to face automatic penalty assessments from the IRS for delinquent international information returns.
Why this matters
The implications of this ruling are significant for globally mobile employees, as the penalty language at issue in聽贵补谤丑测听is used in other international information reporting provisions (such as the penalty provisions addressing the failure to timely file Form 8938,聽Statement of Specified Foreign Financial Assets, and Form 3520,聽Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts).听
The reversal means the IRS will continue to automatically assess penalties for failure to timely report foreign holdings, assets, and trusts before consideration of an assignee鈥檚 request for relief based on reasonable cause. 聽Resolving these penalties with the IRS can be costly and time-consuming, even when the compliance failure is due to an assignee being inexperienced with U.S. reporting requirements.聽
Background
As 乐鱼（Leyu）体育官网 previously reported2, the case in question involved a taxpayer who wholly owned two foreign corporations incorporated in Belize.聽 The taxpayer failed to report the foreign entities on Form 5471 for each year at issue as required. 聽The failure to file was deemed willful and not due to reasonable cause.聽 The IRS assessed penalties totaling nearly US$500,000.
The taxpayer argued that the relevant section in the Internal Revenue Code (Code), unlike many other penalty sections, contains no provision authorizing assessment of the penalty by the IRS. 聽As a result, the taxpayer argued that the penalty for failure to file Form 5471 is not an assessable penalty, although it may be collected through a civil action. 聽The IRS argued that the term 鈥渁ssessable penalties鈥� includes any penalties found in the Code that are not subject to the Code鈥檚 deficiency procedures.
Last year, the Tax Court agreed with the taxpayer, concluding that the IRS assessed penalties against the taxpayer without statutory authority to do so and thus could not proceed with the collection of those penalties from the taxpayer via the proposed levy.3
However, with this ruling the D.C. Circuit Court of Appeals reversed the Tax Court鈥檚 ruling, affirming the IRS's ability to automatically assess penalties under the Code and administratively collect these penalties.
乐鱼（Leyu）体育官网 Insights
While the recent ruling is a setback for taxpayers, it is worth noting that a Supreme Court hearing is possible if other circuit courts rule differently in similar cases. 聽Until then, taxpayers are advised to be diligent in reporting their foreign holdings to avoid penalties being assessed by the IRS.
Additional Resources
Footnotes
1听Farhy v. Commissioner,聽No. 23-1179 (D.C. Cir. May 3, 2024).听 Read the D.C. Circuit鈥檚聽decision.
2 See 鈥淚RS lacks statutory authority to assess penalties under section 6038(b) for willful failure to file Form 5471,鈥� in聽罢补虫狈别飞蝉贵濒补蝉丑听(April 3, 2023), a publication of 乐鱼（Leyu）体育官网 LLP in the United States, by clicking聽here.
3听Alon Farhy v. Commissioner,聽160 T.C. No. 6 (April 3, 2023). 聽Read the Tax Court鈥檚聽.
Related resource
See 鈥淒.C. Circuit: IRS has statutory authority to assess penalties for willful failure to file Form 5471; Tax Court reversed,鈥� in聽罢补虫狈别飞蝉贵濒补蝉丑听(May 3, 2024), a publication of 乐鱼（Leyu）体育官网 LLP in the United States, by clicking聽hereopens in a new tab.
The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
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