IRS Lacks Statutory Authority To Assess Certain Form 5471 Penalties

The recent Tax Court decision in Farhy demonstrates that clever and novel arguments can carry the day in complex tax litigation matters. In that case, the taxpayer stipulated that he: (1) had Form 5471 filing obligations for his 2003 through 2010 tax years; (2) participated in an illegal scheme to reduce the amount of income tax that he owed; and (3) did not have reasonable cause for abatement of the civil penalties assessed against him for his multi-year failure to file Forms 5741. Indeed, the sole contention raised by the taxpayer in Farhy was a statutory interpretation argument: according to the taxpayer, the IRS simply did not have the authority to assess the civil penalties against him in the manner in which they were assessed.