Farhy Notice of Appeal on 5471 Ruling (Is 3520 Impacted?)

Farhy Notice of Appeal

IRS Files Notice of Appeal in Farhy  

The case of Farhy was one of the most taxpayer-friendly case rulings in an international information reporting case ever issued by the Tax Court. That was because, in the case of Farhy, the Tax Court ruled in favor of the Taxpayer in that the IRS did not have the power to assess penalties for Form 5471 short of filing a lawsuit in Federal Court. While the IRS had been silent on how it would proceed on the Farhy ruling, as of last week it became clear that the IRS would challenge the ruling — and filed a Notice of Appeal. Thus, Taxpayers with outstanding Form 5471 issues should be on notice that it appears the IRS has every intent of moving forward and challenging the Tax Court’s ruling that the IRS does not have the power to assess Form 5471 penalties.

The Outcome of Farhy Will Have a Big Impact

The reason why this case is so important is because it can potentially impact several other Internal Revenue Code sections involving the reporting of foreign accounts, assets, and investments. Conceptually, the basis for the ruling in Farhy would apply to other international information reporting form penalties as well such as Form 3520 — which in recent years has become an IRS favorite in which the Internal Revenue Service penalizes taxpayers upwards of 25% value of a foreign gift even in a situation in which there is no unreported income.

Filing Late Form 5471

Even though the Tax Court ruled in favor of taxpayers in the case of Farhy, it is important to note that it is clear that the IRS will challenge this outcome. Taxpayers who are considering getting into compliance should consider all of their options before filing late Form 5471 forms.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and/or reporting requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.