Tuesday, April 9, 2024

TC - Upholds $11M In Late Filed Form 3520 & 3520-A Foreign Reporting Penalties But Not Late Filed Form 5471 Penalty!

The Tax Court has continued to hold that the IRS lacks authority to assess penalties under Code Sec. 6038(b) (following its decision in Farhy, (2023) 160 TC No. 6) and that penalties imposed under Code Sec. 6677 are not fines and therefore do not implicate the Excessive Fines Clause. 

According to Law360, the U.S. Tax Court on April 8, 2024, upheld  $11 million in foreign reporting penalties against a man who admitted he hid money overseas, but the court declined to overturn its ruling that the IRS lacks authority to assess certain Form 3520 & Form 3520 A foreign reporting penalties in 
Mukhi v. Commissioner, docket number 4329-22L, in the U.S. Tax Court.

The Internal Revenue Service didn't abuse its authority in assessing $5 million in penalties against Raju J. Mukhi for failing to report foreign trusts for 2005 to 2008 and another $5.9 million for 2005 to 2010, according to the Tax Court, finding that penalties imposed under I.R.C. § 6677 are not fines and therefore do not implicate the Excessive Fines Clause.

But the IRS lacked authority to issue $120,000 in penalties against Mukhi under Internal Revenue Code Section 6038(b) for failing to timely submit a Form 5471, regarding information reporting for foreign corporations, for 2002 through 2013, the Tax Court said.

While Mukhi's challenge to the penalties was still pending in the Tax Court, it decided in April 2023 in Farhy v. Commissioner that the IRS lacked authority to make assessments under IRC Section 6038(b). After the decision, the IRS asked the court in Mukhi's case to overrule its decision in Farhy, saying it was incorrectly decided, according to Monday's ruling.

But the court said it wanted to give the weight of precedent to its previous decision in Farhy. Furthermore, even though Farhy is on appeal in the D.C. Circuit, Mukhi's case, if appealed, would go to the Eighth Circuit, meaning any ruling from the D.C. Circuit wouldn't be binding for Mukhi, the court said.

Mukhi pled guilty to one count each of filing a false return and failure to file a report of a foreign bank account following his indictment in 2014, according to the opinion. The IRS audited him and issued the penalties in 2017.

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