The Tax Court recently issued its opinion in Farhy v. Commissioner (160 T.C. No. 6), holding that the IRS lacked authority to assess penalties against an individual under Section 6038(b) for failure to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for tax years 2003 through 2010. As a result, the IRS could not proceed with the collection of such penalties via the proposed levy.
The IRS argued it had authority to assess the penalties under Section 6201, which generally authorizes the Treasury Secretary to make assessments of all taxes — “including interest, additional amounts, additions to the tax, and assessable penalties” — imposed by the Code, which the Secretary has delegated to the IRS. When a tax is assessed, the IRS may take certain actions to collect the tax administratively.
The taxpayer argued that Section 6038(b), unlike other penalty sections in the Code, contains no provision authorizing the assessment of the penalty it provides for. Thus, a Section 6038(b) penalty is not an assessable penalty, although it may be collected through a civil action. The IRS responded that the term “assessable penalties” includes any penalties found in the Code that are not subject to the Code’s deficiency procedures.
The Tax Court agreed with the taxpayer’s reading of the Code and found that the IRS assessed penalties under Section 6038(b) without statutory authority to do so. Thus, the IRS could not proceed with the collection of those penalties via the proposed levy.
The Tax Court further noted that Congress explicitly authorized assessments with respect to many penalty provisions — but not for Section 6038(b) penalties.
The court noted it was “loath to disturb this well-established statutory framework by inferring the power to administratively assess and collect the [S]ection 6038(b) penalties when Congress did not see fit to grant that power to the Secretary of the Treasury expressly as it did for other penalties in the Code.”
The IRS will have 90 days after the entry of a decision in the Tax Court to appeal the decision to Federal Court of Appeals for the D.C. Circuit.
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