Tax Court Rejects IRS Again in New 5471 Penalty Case (2024)

Tax Court Affirms Form 5471 (6038(b)) Fines are Improper

Tax Court Affirms Form 5471 (6038(b)) Fines are Improper

In the previous Tax Court case of Farhy, the United States Tax Court ruled that the IRS did not have the authority in accordance with 26 USC 6038(b) to assess penalties for the failure to report Form 5471 with the way they had been doing so (e.g., CP15 Penalty Notice that is ‘Automatically Assessed’). In that case, the court had actually acknowledged that the taxpayer was willful — and even with that extreme set of facts, the Tax Court still rejected the IRS’s position about how they go about issuing form 5471 penalties (it is generally done by automatic assessment by way of a CP15 Notice). In the present case of Mukhi, while the court did sustain other international penalties that were issued against the taxpayer, they rejected the IRS position involving Form 5471. Unfortunately for this taxpayer, the Form 5471 penalties paled in comparison to the other penalties that were issued — but for other taxpayers who may be late or delinquent with filing Form 5471 it is additional ammunition if the IRS were to try to automatically assess them (noting, that in the previous case of Farhy, the government signaled its intent to appeal). Let’s see what the court said about 5471 penalties.

Tax Court Ruling on Form 5471 (6038)(b))

• • • • After the parties filed their respective motions, we held in a separate case that the IRS lacks the authority to assess the section 6038(b) penalty. See Farhy v. Commissioner, No. 10647-21L, 160 T.C., slip op. at 5-14 (Apr. 3, 2023). The IRS later appealed Farhy to the U.S. Court of Appeals for the District of Columbia Circuit. See Farhy v. Commissioner, No. 23-1179 (D.C. Cir. filed July 24, 2023). Respondent filed a Notice of Judicial Ruling acknowledging the Farhy decision; however, neither party sought to supplement its respective motion.

      • On December 14, 2023, we ordered the parties to file briefs on the implication of Farhy for the current case and the necessity to reach the Excessive Fines Clause issue as it relates to the section 6038(b) penalty. In his brief, respondent argued that we should overrule Farhy and hold that he has the authority to assess penalties under section 6038(b). Following that approach, respondent argues we should resolve the Excessive Fines Clause issue. In contrast, petitioner argues that, if affirmed, Farhy resolves this case with respect to the section 6038(b) penalties. Petitioner has indicated his intent to request the Court to determine that respondent cannot proceed with the collection actions as they relate to the section 6038(b) penalties if Farhy is affirmed by the D.C. Circuit. Both parties agree that Farhy does not prevent this Court from determining whether the penalties under section 6677 violate the Excessive Fines Clause.

      • Here, there is an independent, nonconstitutional basis to resolve the issue of whether respondent’s determination to sustain collection actions related to section 6038(b) was an abuse of discretion: respondent lacks the authority to assess penalties under section 6038(b). See Farhy, 160 T.C., slip op. at 5-14. Respondent assessed penalties under section 6038(b) against petitioner without the authority to do so, which consequently means that respondent may not proceed with the collection of the section 6038(b) penalties from petitioner via the proposed levy or lien. See Farhy, 160 T.C., slip op. at 14. Therefore, there is no need to reach the constitutional issue of whether the penalties under section 6038(b) violate the Excessive Fines Clause.

      • Respondent argues that we should revisit and overrule our holding in Farhy because he believes it was decided incorrectly. We adhere to the doctrine of stare decisis and thus afford precedential weight to our prior reviewed and division opinions. See Sanders v. Commissioner, No. 15143-22, 161 T.C., slip op. at 6 (Nov. 2, 2023). Respondent’s argument that Farhy was decided incorrectly is not sufficient justification alone to warrant reconsideration of its holding. See Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 266 (2014).

      • Moreover, the mere fact that Farhy is currently on appeal at the D.C. Circuit is insufficient. This case is appealable to the Eighth Circuit, and therefore any ruling from the D.C. Circuit would not be binding on this proceeding. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970) (stating that when a “squarely [o]n point” decision of the appellate court to which an appeal would lie contradicts our own precedent, we will follow the appellate court’s decision), aff’d, 445 F.2d 985 (10th Cir. 1971). The Eighth Circuit has not spoken as to the question of whether the IRS has the authority to assess section 6038(b) penalties. Where we are not constrained by precedent of the pertinent court of appeals, we follow stare decisis and apply our own precedent.⁸ See Lawrence v. Commissioner, 27 T.C. 713, 716-17 (1957), rev’d per curiam on other grounds, 258 F.2d 562 (9th Cir. 1958).

      • We further see no reason to delay resolution of this issue until the resolution of the appeal in Farhy by the D.C. Circuit. Rule 121(g)(2) permits the Court to grant a motion for summary judgment on grounds not raised by the parties after notice and a reasonable time to respond. Our order to brief the implications of Farhy gave adequate notice of the possibility that we may grant partial summary judgment for petitioner on this issue, and both parties had reasonable time to respond in the form of their briefs. Respondent could not assess the penalties under section 6038(b), and therefore as a matter of law respondent may not proceed with the collection of the section 6038(b) penalties from petitioner via the proposed levy or lien. We will grant partial summary judgment on this issue in favor of petitioner.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) 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 who 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.