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Tax & Assurance Guidance

Tax Court Decision: IRS Lacks Authority to Assess Form 5471 Penalties

Posted on April 5, 2023 by

Sue Tuson

Sue Tuson

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IRSWhat are the current penalties?

Form 5471

The Tax Court issued an opinion in Alon Farhy v. Commissioner, 160 T.C. 6 ( April 3, 2023), finding that the Internal Revenue Service lacked statutory authority to assess penalties under Internal Revenue Code §6038(b)(1) or (2) against a taxpayer who failed to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. The IRS automatically assesses a $10,000 penalty per year per form when a taxpayer fails to file form 5471 or files it late.

Form 5472

Similar penalties apply to the failure to file or late filing of Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. These penalties are automatically assessed at $25,000 per form per year. It may be found that the IRS also lacks the authority to assess these penalties.

This does not mean the IRS doesn’t have other avenues for assessing penalties under civil law. However, that process is more involved.

What should you do if you have been assessed Form 5471 or 5472 penalties?

File A Protective Refund Claim

Taxpayers who have been assessed these penalties should file a protective claim for refund. The IRS may appeal the decision, and refund claims would be held until the outcome of the judicial process.

Which statute of limitation rules would apply to refund claims related to these penalties?

It’s unclear which statute of limitation rules would apply to refund claims related to these penalties. The general statute of limitations to claim a refund is three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. Other provisions for filing action against the U.S. government allow for a six-year statute.

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Contact us today if you would like more information about Form 5471 or 5472 penalties and protective refund claims.

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Sue Tuson

Shareholder, International Tax

As an international tax advisor, Sue helps businesses structure their operations globally to mitigate tax costs and maximize profits.

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