New Ruling Determines IRS Can Assess Penalties for Failure to File Form 5471

Failure to File Form 5471 – IRS Assessment of Penalties Remain the Same

In a previous article, we discussed that on April 3, 2023, the U.S. Tax Court issued a ruling in Farhy v. Commissioner that had extensive implications regarding how some tax penalties for failure to file certain foreign information tax forms are assessed under the Internal Revenue Code. Specifically, the ruling stated the Internal Revenue Service (IRS) did not have the authority to assess penalties related to Farhy’s failure to file Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations. As a result of this ruling, many tax advisors and attorneys began entering disputes with and refunding claims to the IRS for their clients. However, on May 3, 2024, the U.S. Court of Appeals for the District of Columbia issued an opinion overruling the U.S. Tax Court decision.

Court of Appeals’ Decision to Overturn the Ruling

In short, the Court of Appeals’ ruling returns the IRS’s authority to assess penalties under IRC Section 6038 to the status quo.  The Court of Appeals noted that since Section 6038(b) was added in 1982, over 40 years ago, “Congress has amended section 6038 seven times and each time, it has left undisturbed the IRS’s practice of assessing and administratively collecting penalties imposed under section 6038(b).” Specifically, the Court stated:

“It is well established that when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress.”

Impact to Taxpayers

Although Farhy may attempt to appeal this case to the U.S. Supreme Court, the current standing is that the IRS has the right to assess penalties against taxpayers for failure to file their foreign informational forms with their U.S. tax returns. In general, the penalties for failure to file are as follows: $10,000 per form per year, up to a max of $60,000 per form per year.

If you have ownership in a foreign entity and need to confirm you are in compliance with filing, please contact your Windham Brannon advisor today, or reach out to Brandi M. Samuel.

This article was authored in conjunction with Roger Lang, Experienced Tax Associate.