The IRS recently suffered a setback in the U.S. Tax Court in the Mukhi v. Commissioner of Internal Revenue case, a collection due process case, which mirrored last year’s ruling in Alon Farhy v. Commissioner of Internal Revenue. The Tax Court’s decision once again raised questions about the agency’s ability to assess and collect penalties through administrative means without additional steps such as civil litigation. The ruling in Farhy had a significant impact on taxpayers facing penalties for failure to file certain forms, such as Form 5471, and the court’s decision in Mukhi reinforced this finding.
In Farhy, the taxpayer failed to report his ownership interests in foreign corporations and was subjected to penalties under section 6038(b) by the IRS. The court in Farhy found that while the penalties were included in the statute, the IRS did not have the legal authority to assess and collect those penalties in the manner it had done. The ruling in Farhy set a precedent for cases like Mukhi, where taxpayers were facing civil tax penalties for failure to file required forms, leading to further challenges to the IRS’s authority to levy such penalties through administrative means alone.
In Mukhi, the taxpayer faced millions in civil tax penalties for failure to timely file various information returns, including Form 3520, Form 3520-A, and Form 5471. The taxpayer challenged the penalties as unconstitutional, citing the Eighth Amendment’s excessive fines clause. The court, however, found an independent, nonconstitutional basis to resolve the issue, referencing the ruling in Farhy that the IRS did not have the authority to assess penalties under section 6038(b) without additional steps, such as civil litigation.
The court also rejected the taxpayer’s arguments related to penalties under section 6677, finding that they were not fines but penalties aimed at encouraging voluntary compliance with tax laws. The court’s decision in Mukhi reaffirmed the findings in Farhy, further complicating the IRS’s ability to assess and collect penalties for failure to file certain information returns. The court’s reliance on stare decisis, a legal principle that decisions should be guided by precedent, meant that it was unwilling to revisit its previous ruling in Farhy.
The ruling in Mukhi continues to have implications for taxpayers facing penalties for failure to file certain information returns, such as Form 5471. While an appeal is pending, the court’s decision in Farhy and Mukhi sets a precedent that may impact how the IRS assesses and collects penalties in similar cases moving forward. Taxpayers should stay informed about any developments in these cases to understand how they may be impacted by the court’s decisions.
