The D.C. Circuit Court ruled that the IRS does have the authority to assess foreign information return penalties, overturning a previous ruling by the Tax Court. In the case of Farhy, the taxpayer failed to report his ownership interests in foreign corporations as required by law, resulting in significant penalties being assessed by the IRS. While Farhy did not dispute that he failed to file or pay, he challenged the IRS’ legal authority to assess these penalties under section 6038.
The Tax Court had ruled in Farhy’s favor, stating that the IRS did not have the statutory authority to assess penalties under section 6038. However, the Circuit Court disagreed, finding that the penalties imposed for violating section 6038 are indeed assessable. The court noted that Congress had intended for these penalties to be assessable and had consistently allowed the IRS to assess and collect them since adding subsection (b) to the statute in 1982.
Tax planning and controversy attorney Eric Rietveld stated that the ruling in Farhy is a good compromise between the interests of the taxpayer and the IRS. While Farhy lost the case, the court did not give the IRS unlimited power to assess penalties indiscriminately. Rietveld suggested that taxpayers should not be overly concerned, as the ruling does not significantly change the IRS’ enforcement practices.
The ruling in Farhy may have implications for similar cases, such as Mukhi v. Commissioner of Internal Revenue, where the Tax Court also relied on the argument presented in Farhy. The IRS may seek to push back against previous rulings where they lost based on the outcome of Farhy, but with no circuit split, it is unlikely that the case will be taken to the Supreme Court. Overall, the ruling in Farhy should strengthen the IRS’ enforcement ability with respect to penalties imposed under section 6038.
In conclusion, the D.C. Circuit Court’s ruling in Farhy clarifies that the IRS has the authority to assess foreign information return penalties under section 6038. The decision overturns a previous ruling by the Tax Court and establishes a precedent for future cases involving similar issues. While the ruling is a win for the IRS, it also strikes a balance between taxpayer rights and government enforcement power, providing a clearer framework for assessing penalties in cases of non-compliance with reporting requirements for foreign corporations.
