IRS Lacked Authority to Assess Foreign Info Reporting Penalties

IRS Lacked Authority to Assess Foreign Info Reporting Penalties

U.S. Tax Court

The Tax Court held in a collection review case that the IRS lacked authority to assess penalties against an individual under section 6038(b) for failing to file information returns regarding his foreign corporations and that the IRS could not proceed with a proposed levy against him to collect the penalties. Alon Farhy failed to file Forms 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations," for his Belize foreign corporations. For that, the IRS imposed initial penalties under section 6038(b) and then continuation penalties for the 2003-2010 tax years. When Farhy failed to pay the penalties, the IRS sent him a notice of intent to levy. He requested a collection due process hearing challenging the agency's authority to assess the penalties. The IRS sustained the proposed collection action and Farhy petitioned the Tax Court for review. The parties stipulated the facts of the case and according to Judge L. Paige Marvel, the only issue before the Tax Court was whether the IRS had authority to assess the penalties under section 6038(b). Farhy claimed that section 6038(b) contains no provision for the IRS to assess the penalties imposed under that section, so the agency could not assess the penalties or collect them through an administrative action. The Tax Court agreed. Marvel found that Congress did not expressly grant Treasury the power to assess the penalty in section 6038(b) as it did for other penalties. The court also rejected the IRS’s argument that it had authority under section 6201, finding that the assessment authority in section 6201 doesn’t apply to all penalties in the code. Marvel wrote, “We decline to substitute the Commissioner’s judgment for Congress’ decision not to deem the section 6038(b) penalties ‘taxes’ for assessment and collection purposes.” The Tax Court concluded that the IRS had assessed the penalties under section 6038(b) without authority to do so and could not proceed with collection via the proposed levy.

The Tax Court held in a collection review case that the IRS lacked authority to assess penalties against an individual under section 6038(b) for failing to file information returns regarding his foreign corporations and that the IRS could not proceed with a proposed levy against him to collect the penalties.

The Tax Court held in a collection review case that the IRS lacked authority to assess penalties against an individual under section 6038(b) for failing to file information returns regarding his foreign corporations and that the IRS could not proceed with a proposed levy against him to collect the penalties. Alon Farhy failed to file Forms 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations," for his Belize foreign corporations. For that, the IRS imposed initial penalties under section 6038(b) and then continuation penalties for the 2003-2010 tax years. When Farhy failed to pay the penalties, the IRS sent him a notice of intent to levy. He requested a collection due process hearing challenging the agency's authority to assess the penalties. The IRS sustained the proposed collection action and Farhy petitioned the Tax Court for review. The parties stipulated the facts of the case and according to Judge L. Paige Marvel, the only issue before the Tax Court was whether the IRS had authority to assess the penalties under section 6038(b). Farhy claimed that section 6038(b) contains no provision for the IRS to assess the penalties imposed under that section, so the agency could not assess the penalties or collect them through an administrative action. The Tax Court agreed. Marvel found that Congress did not expressly grant Treasury the power to assess the penalty in section 6038(b) as it did for other penalties. The court also rejected the IRS’s argument that it had authority under section 6201, finding that the assessment authority in section 6201 doesn’t apply to all penalties in the code. Marvel wrote, “We decline to substitute the Commissioner’s judgment for Congress’ decision not to deem the section 6038(b) penalties ‘taxes’ for assessment and collection purposes.” The Tax Court concluded that the IRS had assessed the penalties under section 6038(b) without authority to do so and could not proceed with collection via the proposed levy.

Sec. 6038 Information reporting with respect to certain foreign corporations and partnerships

Sec. 6330 Notice and opportunity for hearing before levy

Sec. 6201 Assessment authority

United States

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IRS Lacked Authority to Assess Foreign Info Reporting Penalties