May 10, 2023
The U.S. Tax Court (USTC) on April 3, 2023, issued its opinion in Alon Farhy v. Commissioner, which held that the IRS lacks authority to assess certain foreign-related information return penalties pursuant to Section 6038(b). The subsequent fallout will certainly be subject to future litigation that taxpayers should closely monitor for years to come.
The immediate impact of the Farhy opinion is more apparent, there are refund opportunities for penalties paid to the IRS pursuant to Section 6038(b).
Beyond the direct implications of the Farhy case to Section 6038(b) penalties, this USTC decision could have significant further implications by extension to other information reporting obligations as well as determining the relevant statute of limitations that should apply to enforcement of the penalty provisions.
Similar to Section 6038(b), there are several other penalty provisions that do not expressly specify treatment as a tax or assessable penalty. For example, none of the information reporting penalties under Sections 6038A(d) (Form 5472), 6038B(c) (Forms 926 and 8865), or 6038D(d) (Form 8938) specify that such penalties shall be treated as a tax or assessable penalty. Thus, based on Farhy, the IRS has no authority to assess these penalties and may only enforce or recover such penalties through a civil action as authorized by 28 U.S.C. § 2461(a).
Because the court concluded that the term “taxes” in Section 6201 is not broad enough to encompass Section 6038(b) penalties, the term “tax” under Section 6501 (dealing with statute of limitations) presumably is not broad enough to encompass such penalties. This is consistent with the IRS’ longstanding position that penalties assessed are not subject to any period of limitations under the Code (see Internal Revenue Manual section 20.1.9.1.1(3) “Penalties that are not considered taxes generally have no statute of limitation for assessment”). The statute of limitations contained in Section 6501 applies only to penalties imposed under subchapter B of Chapter 68 of the Code (deemed a “tax” per Section 6671(a)), not penalties imposed under Chapter 61 (such as Section 6038(b) penalties). As a result, there are no statute of limitations provisions in the Code that would govern penalties imposed under Section 6038(b) or similar provisions.
Alternatively, however, such penalties could be subject to the limitations period provided in 28 U.S.C. § 2462, which provides, “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil penalty shall not be entertained unless commenced within five years from the date when the claim first accrued.” Since no statute of limitations is “otherwise provided” for Section 6038(b) or similar penalties, the enforcement of such penalties should be subject to the limitations of 28 U.S.C. § 2462. As a result, there are no statute of limitations provisions in the Code that would govern penalties imposed under Section 6038(b) or similar provisions.
It would seem that taxpayers who were assessed penalties by the IRS for non-filing of Forms 5471, 5472, 926, 8865 or 8938 should file refund claims to recover the amounts paid. It would seem certain that any penalties paid over the past 5 years would have an open statute, and its possible that any penalties paid even beyond the 5 year period can be refunded.
Please contact Brian Schwam or Todd Hedgpeth @ 866-298-7829 for more information.