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  • Brittany Besler

Tax Court rules the IRS lacks the authority to impose penalities for failure to file Form 5471.

Bottom Line:

The U.S. Tax Court held that the IRS did not have statutory authority to assess penalties under section 6038(b) against a taxpayer who willfully failed to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for his 2003–2010 tax years. As a result, the IRS could not proceed with collection of such penalties from the taxpayer via the proposed levy.


Background:

Alon Farhy failed to file Forms 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations," for his Belize foreign corporations. In turn, the IRS imposed initial penalties under section 6038(b) and then continuation penalties for the 2003-2010 tax years. When Farhy failed to pay those penalties, the IRS sent him a notice of intent to levy. He requested a collection due process hearing challenging the agency's authority to assess the penalties. The IRS sustained the proposed collection action and Farhy petitioned the Tax Court for review.


Argument:

The parties stipulated the facts of the case and according to Judge L. Paige Marvel, the only issue before the Tax Court was whether the IRS had authority to assess the penalties under section 6038(b). Farhy claimed that section 6038(b) contains no provision for the IRS to assess the penalties imposed under that section, so the agency could not assess the penalties or collect them through an administrative action. The Tax Court ultimately agreed.


The court noted that Congress explicitly authorized assessment powers with respect to a number of other penalty provisions in the Code, but not for section 6038(b) penalties. The court stated it was “loath to disturb this well-established statutory framework by inferring the power to administratively assess and collect the section 6038(b) penalties when Congress did not see fit to grant that power to the Secretary of the Treasury expressly as it did for other penalties in the Code.”


Opinion:

Marvel found that Congress did not expressly grant Treasury the power to assess the penalty in section 6038(b) as it did for other penalties. The court also rejected the IRS’s argument that it had authority under section 6201, finding that the assessment authority in section 6201 doesn’t apply to all penalties in the code. Marvel wrote, “We decline to substitute the Commissioner’s judgment for Congress’ decision not to deem the section 6038(b) penalties ‘taxes’ for assessment and collection purposes.”

The Tax Court concluded that the IRS had assessed the penalties under section 6038(b) without authority to do so and could not proceed with collection via the proposed levy.


Read the full opinion here.

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