Last year around this time, many international tax practitioners were still rejoicing over the text-driven opinion in Farhy v. Commissioner, 160 T.C. No. 6 (2023), where the Tax Court ruled that due to the lack of specific imprimatur, the IRS could not summarily assess penalties under section 6038(b) against an individual for failure to file the Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” Resort would therefore be necessary for the Department of Justice to sue to obtain judgment, a certainly more cumbersome route. So, in that Prague Spring, it seemed the zeitgeist might be shifting in the outbound taxpayer’s favor with regard to the “draconian” international penalty regime that is deplored even by the Taxpayer Advocate. See NTA Blog.
Alas, in Farhy v. Commissioner, 2024 U.S. App. LEXIS 10843, the Court of Appeals for the District of Columbia, turned to that old-time religion rooted in the assessment power as underlying the IRS’s self-help collection remedies. In particular, the circuit court observed: “It is the rare federal tax that can only be recovered through a government-initiated lawsuit.” The circuit court proceeded to find clear congressional intent in allowing the IRS to summarily assess the penalty.
As a consequence, the field of international tax penalties remains a minefield for outbound taxpayers, and one that should not be trod without proper advice. Check with Kim & Rosado before you leap. Don’t wait.