Tuesday, June 27, 2023

Have You Been Assessed or Paid a Non-Assessable Information Penalty? - You Need to Contest After Farhy!

On April 25, 2023, we posted Is It Time To Request Refunds For Form 5471, 5472, 8938, and 3520 Late Filing Penalties? where we discussed that 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”). 

Judge Marvel Disagreed And Prevented The IRS From Proceeding With The Collection Of The Penalties By Levy Because They Were Not “Assessable Penalties” Under The Code.

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 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

If you have a Late Information Filing Penalty, under any of the following Non-Assessable IRC Sections:

You need to consider contesting and/or requesting a refund.

Want To Request Refunds For Form 5471, 5472,
8938, & 3520 Late Filing Penalties?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
Toll Free at 888 8TAXAID (888-882-9243)

1 comment:

  1. Per Procedurally Taxing, the Government Files Notice of Appeal in Farhy

    One of the most consequential tax procedure opinions in the last year is Farhy v Commissioner, where the Tax Court held that the IRS could not assess penalties under Section 6038(b) for failing to file an information return with respect to foreign corporations. Earlier this week, the government filed a notice of appeal. As the taxpayer resided in Israel at the time of the petition’s filing, venue is with the DC Circuit Court of Appeals.

    I must confess I was one of the skeptics who thought that the IRS’s broad authority to assess under Section 6201(a) allowed the IRS to assess 6038(b) penalties and other information-based penalties located outside of Chapter 68 (for some of my thoughts prior to the opinion see Tax Court To Consider IRS Procedure For Imposing Information Reporting Penalties). And it still seems odd to me that Congress would have intended a separate process requiring DOJ litigation for sanctioning taxpayers who fail to disclose interests in foreign corporations but who do not disclose interests in other foreign entities.

    Farhy has broad implications. As Velarde noted($) IRS has indicated that it will concede Section 6038(b) penalties in CDP cases. Taxpayers who have paid this penalty and other similar penalties (I list the likely ones in my earlier PT post) would be well advised to file protective refund claims.