IRS Lacks Statutory Authority to Assess Penalties Under Section 6038(b) for Willful Failure to File Form 5471

After the US Tax Court ruled in favor of a taxpayer over filing under section 6038(b), tax payers who have faced similar penalties may be eligible for a refund. 

Alon Farhy V. Commissioner

On April 3, 2023, the US tax court ruled that the Internal Revenue Service (IRS) couldn’t issue penalties under Internal Revenue Code (IRC) 6038(b) for the case against Alon Farhy. Now, taxpayers facing this penalty may be eligible to be abated or refunded. 

From 2003 to 2010, Alon Farhy failed to file form 5471 alongside his US Tax Return. International taxpayers who fail to file Form 5471 first receive a notice and after 90 days of failure to file, are issued a $10,000 penalty. At max, taxpayers can owe up to $50,000 in penalties for failure to file, an amount Farhy was looking at for every year they didn’t file. 

Tax court documents from Alon Farhy v. Commissioner outline Farhy’s argument that “unlike a bevy of other penalty sections in the Code, contains no provision authorizing the assessment of the penalty it provides for (pg. 6, para 3).” While the court acknowledged the respondent correctly identified Farhy’s failure to file, they sided with Farhy – willful failure to file Form 5471 is not an “assessable penalty.”   

Future Filing of the 6038(b)

According to Tax Controversy 360, it’s likely that the IRS will stop collections under the tax penalty and will seek assistance from Congress to mediate the errors in the code. They also suggest this ruling will result in reviewing other Codes for similar issues. 

Next Steps

If you have paid these penalties or are facing collection actions, where these penalties are part of the liability, contact us to review your case and potentially get these penalties abated or refunded.