Tax Court Ruling on IRS Authority to Assess Form 5471 Penalties

Updated on March 3, 2024

Form 5471, required for US persons with ownership in foreign corporations, has been a point of contention due to its associated hefty penalties. The Internal Revenue Code (IRC) Sec. 6038(b) typically mandates a $10,000 USD penalty per form, up to $50,000 USD. However, a recent Tax Court ruling challenges the IRS's authority to impose these penalties.

Case Background

A U.S. taxpayer failed to report 100% ownership in two Belizean corporations from 2003 - 2010. The IRS assessed the maximum penalties in 2018 and issued a Final Notice of Intent to Levy in 2019. The taxpayer disputed the IRS's authority in a collection due process hearing and later took the issue to Tax Court.

Tax Court’s Decision

The Tax Court ruled in the taxpayer's favor, determining that Congress did not explicitly authorize the IRS to assess penalties under section 6038(b). This means the IRS currently lacks authority to enforce these penalties via levy.

Implications of the Ruling

This judgment is significant for those facing Form 5471 penalty assessments. It suggests the IRS currently cannot assess penalties for this form, but it doesn't eliminate the obligation to file. Also, the IRS can still pursue these penalties through separate civil actions.

Similar implications apply to other forms like 926 and 8938, where the Code doesn’t explicitly authorize penalty assessments by the IRS.

Final Thoughts

This ruling is a reminder of the complexities of US tax law, especially for expats with foreign financial interests. While it offers a temporary respite, it's crucial to stay compliant and consult qualified professionals for any tax planning or reporting.