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IRS Has No Statutory Authority to Assess Penalties for IRS Form 5471

IRS Has No Statutory Authority to Assess Penalties for IRS Form 5471

IRS Has No Statutory Authority to Assess Penalties for IRS Form 5471

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. Please contact any member of Procopio’s International Tax Group if you have further questions or need any assistance.


John C. Miles

Partner

John serves clients through domestic business and tax planning. He assists in the development of business transactions including general matters; financing structures; mergers and acquisitions (including matters related to the development of real estate); and strategic joint ventures with significant experience working in the healthcare field. John also has extensive experience planning tax-free reorganizations, advising on the choice of entity, and on the effectiveness of S corporation elections. He previously was a licensed stock broker at a financial firm in Point Loma.

John serves clients through domestic business and tax planning. He assists in the development of business transactions including general matters; financing structures; mergers and acquisitions (including matters related to the development of real estate); and strategic joint ventures with significant experience working in the healthcare field. John also has extensive experience planning tax-free reorganizations, advising on the choice of entity, and on the effectiveness of S corporation elections. He previously was a licensed stock broker at a financial firm in Point Loma.

Eric D. Swenson

Partner

Eric focuses on tax controversy and business transactions. He represents corporations, partnerships, nonprofits and individuals in federal, state and local tax disputes including audits, appeals and litigation before several tax agencies. Eric has extensive experience structuring and planning corporate mergers and acquisitions including tax-free reorganizations, choice of entity, debt and equity restructuring, litigation settlements, employment and executive compensation. He is a former Internal Revenue Service tax attorney.

Eric focuses on tax controversy and business transactions. He represents corporations, partnerships, nonprofits and individuals in federal, state and local tax disputes including audits, appeals and litigation before several tax agencies. Eric has extensive experience structuring and planning corporate mergers and acquisitions including tax-free reorganizations, choice of entity, debt and equity restructuring, litigation settlements, employment and executive compensation. He is a former Internal Revenue Service tax attorney.

Luis Arturo Zendejas Ruiz

Luis is an International Legal Intern at Procopio. He earned an LLM in U.S. International Taxation at the University of Florida.
Luis is an International Legal Intern at Procopio. He earned an LLM in U.S. International Taxation at the University of Florida.

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