Tax Court Rebuts IRS Ability to Assess Penalty Following Failure to Report Foreign Interests

tax courtIn April, the Tax Court ruled in favor of the taxpayer in Farhy vs. Commissioner of Internal Revenue. The findings of the court will be challenged as the IRS recently appealed the case.


Alon Farhy is a taxpayer who owns 100 percent of two companies incorporated in Belize. Between 2005 and 2010, Mr. Farhy illegally worked to reduce the amount of his taxes due. In 2012, Mr. Farhy signed an affidavit attesting to his scheme in exchange for immunity from prosecution. As with all taxpayers who own interest in foreign corporations or assets, Mr. Fahy was also obligated to file Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). Almost needless to say, Mr. Farhy did not file the requisite Form 5471 for the years at issue.


In February 2016, the IRS mailed Mr. Farhy a notice reminding him of the forms due. Because he did not file the forms following this notice, the IRS found that Mr. Farhy’s failure to do so was “willful and not due to a reasonable cause.” Given that, the IRS assessed Mr. Farhy $10,000 for each year at issue, and the penalties stacked up from there.


In 2019, the IRS sent Mr. Fahy a notice regarding the collection of the penalties due. In response, Mr. Fahy requested a hearing on the assessment. One of the issues asserted by Mr. Fahy is that the IRS does not have the legal right or authority to assess penalties listed under section 6038 of the Tax Code. Section 6038 relates to the requirement of U.S. taxpayers to report on foreign businesses that they own or control. The section, of course, describes penalties due if a taxpayer fails to file required reports.


Following a hearing on the matter, quite simply, the Tax Court found that the IRS “lacks statutory authority to assess penalties under section 6038(b)1).” The Court also prevented the IRS from proceeding with a collection action against Mr. Fahy. Fundamentally, the Tax Court found that the language in the cited section does not give the IRS the right to assess and collect the penalties it sought against Mr. Fahy. Interestingly, the Taxpayer Advocate Service (TAS) also agreed with the findings of the Tax Court.


As a result of the ruling, taxpayers who have been assessed similar penalties by the IRS might want to consider filing a claim. Speak with a tax attorney familiar with the IRS and foreign information penalties to learn how this case may impact penalties you have paid or have been assessed to pay.


To add to that, the IRS filed a Notice of Appeal on the matter in July of this year. It is not over and may not be for some time to come.


Are you concerned about an IRS audit, assessment, or potential tax fraud?  Speak with our law firm today

For expert legal advice and support regarding IRS matters, Robert J. Fedor, Esq., LLC is here to help. With offices in Chicago and Cleveland, we're well-equipped to assist clients both domestically and internationally. Whether you failed to file your FBAR or are confronting criminal tax allegations, our team is ready to provide the guidance and representation you require. Contact our office online or give us a call at 800-579-0997 to discuss your specific situation and legal needs.


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