[co-author: Luis Arturo Zendejas Ruiz]
The U.S. Tax Court ruled recently that the U.S. Internal Revenue Service has no statutory authority to assess (or collect) civil penalties under IRC §6038(b) for failure to file or filing late IRS Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” in Alon Farhy v. Commissioner, issued April 3, 2023.
The Farhy case related to the taxpayer’s failure to file IRS Form 5471, which is required to report a taxpayer’s direct, indirect, and constructive interest or ownership of a foreign corporation. IRS Form 5471 must be filed with the taxpayer’s annual income tax return.
The penalty for failing to timely file IRS Form 5471 is $10,000 for each year and for each foreign corporation. IRC §6038(b). This penalty may be increased up to $50,000 if the failure to file continues for more than 90 days after the IRS mails notice of such failure to the taxpayer. The Farhy case stands for the proposition that the IRS is not authorized to assess these penalties.
It is not clear if the IRS will appeal the Tax Court decision and what that outcome may be on such appeal.
Accordingly, if you have been assessed a penalty under IRC §6038(b) by the IRS and paid such penalty within the last two years, you should consider immediately discussing with your tax advisors whether you should file a claim for refund, protective or otherwise. If you wait too long, you may be barred from claiming a refund of penalties you have paid because the applicable statute of limitation (SOL) to claim such refund may have expired. The SOL to claim a refund of taxes or penalties paid is generally the later of: (a) three (3) years from the date the tax return was filed; or (b) two years from the date the tax or penalty was actually paid.
Based on the Tax Court’s reasoning in Farhy, the IRS may also lack authority to assess civil penalties for failing to timely file other various international information returns (e.g., Forms 3520, 5472, 8938, etc.). Each case, however, must be analyzed individually.
Time is of the essence (generally two years from when the penalty was paid) to request a refund of any penalties paid to the IRS.
