How Foreign Info Return Penalty Case May Benefit Taxpayers

On April 3, in Farhy v. Commissioner, the U.S. Tax Court rejected the Internal Revenue Service's efforts to impose penalties on a taxpayer for failure to file foreign corporation information return Form 5471. According to the Tax Court, foreign information return penalties are neither taxes nor assessable penalties and, therefore, the IRS lacks statutory authority under Internal Revenue Code Section 6038 to assess and collect such penalties.

Though based on the definition of "assessable penalties," the Farhy decision has implications far beyond failures to file Form 5471. The IRS will likely seek relief, either by appealing the Tax Court's decision or through legislation, but taxpayers who have been assessed or paid penalties for late-filed information returns should consider how to protect their rights in the interim.