IRS Cannot Enforce International Tax Forms? For Now, Maybe.

The U.S. Tax Court, in Farhy v. Commissioner, recently came down with a huge win for taxpayers facing penalties for not filing some international tax forms. In their decision, the Court determined that certain penalties assessed for failure to file informational returns were beyond the statutory authority of the IRS. As such, many taxpayers filing informational returns may be able to avoid costly penalties.

In Farhy, the taxpayer was the sole owner of two corporations in Belize from 2003 to 2010. During those years, the taxpayer failed to report his interests in the businesses on Form 5471 and faced a $50,000 penalty. Farhy, of course, appealed the penalty against him and argued that the IRS lacked the statutory authority to assess these types of penalties. The taxpayer’s argument was nuanced based on the manner in which the IRS sought to collect the penalty, contending that the IRS may only collect the penalty through a civil action, not a proposed levy.

The Tax Court agreed with Farhy and concluded that Congress did not authorize the IRS to levy these types of penalties. The result? The IRS now must sue the taxpayer and be granted judgment in federal court to collect the penalties owed by the taxpayer. Not an easy or efficient process for the IRS.

Farhy is a win for all taxpayers filing international informational returns, not just those filing Form 5471. If narrowly interpreted, taxpayers will no longer be subject to levy for penalties related to their willful late filing of Form 5471. If interpreted more broadly, similar penalties for other delinquent filing of informational returns, such as Form 5472, Form 926, and Form 8865 could also be subject to the same procedural requirements. Regardless, this ruling provides taxpayers with an additional level of protection when it comes to late filing penalties.

While this is a precedential Tax Court opinion, the case still has the potential for overturn on appeal, for Congress to adjust the wording of the law, or for the IRS to take civil actions. If so, taxpayers could remain eligible for levy due to their willful late informational return filings. Additionally, while this case removes the IRS’s ability to levy some taxpayers, those with Form 5471 reporting requirements are still obligated to file before the deadline. Taxpayers subject to Form 5471 filing requirements should therefore consult with a U.S. tax attorney to ensure compliance and argue for you in the case the government elects to file a lawsuit, and not just rely that they will not be penalized based on this decision.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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