Automatic Form 5471 Penalty Still in Question, as Farhy Files Petition for Rehearing

On June 4, 2024, Alon Farhy filed a petition for a panel rehearing with the circuit court in response to the May 3, 2024, DC Court of Appeals ruling upholding the IRS’s power to assess Form 5471 penalties.The petition, 15 pages is length, argues that the three-judge panel erred in a handful of respects, and incorrectly concluded that Congress authorized the IRS to assess and ultimately collect the $10,000 penalty for failure-to-file Form 5471 through administrative means.

As a recap, Farhy initially prevailed against the IRS in April 2023 when the Tax Court decided that the IRS lacked the statutory authority to administratively assess the $10,000 penalty for failure-to-file Form 5471. A little over a year later, on May 3, 2024, the DC Court of Appeals ruled that the IRS had the authority to automatically assess the $10,000 penalty for failure-to-file Form 5471, overturning the three-judge panel’s decision relying heavily on statutory construction and congressional intent, and reinstated the nearly $500,000 in penalties assessed by the IRS against Alon Farhy.

Complicating the matter is the Tax Court decision in Mukhi v. Commissioner. In Mukhi, the Tax Court ruled in favor of the taxpayer on his 5471 claim, basing its decision on the precedent set in Farhy. The court held the IRS lacked the authority to automatically assess failure-to-file Form 5471 penalties. The ruling in Mukhi continues to be sound despite the DC Circuit Court’s decision because the Tax Court’s decision in Mukhi would be appealable to the Eight Circuit Court of Appeals – rendering the DC Circuit’s decision nonbinding in the Mukhi case. The ruling also sets the stage for a potential circuit split.

While the future of Farhy may be uncertain, it continues to be critical for taxpayers to file their foreign information returns to fully disclose all cross-border activity on a timely filed return. If you have a concern that you may have missed filing a foreign information return or want to discuss the various reporting requirement, please reach out to your Withum advisor. The IRS offers various Voluntary Disclosure programs which may result in the reduction or elimination of these penalties.

Authors: Manpreet Sangha | [email protected] and Marcus Dyer, JD, CPA, Principal and Co-Leader of Tax Controversy | [email protected]