Penalty for Failure to Report an Interest in Foreign Corporation
By Tom Ochsenschlager, JD, CPA
A person who controls a foreign corporation must file a Form 5471, Information Return of U.S Persons with Respect to Certain Foreign Corporations, each year to disclose the taxpayer’s ownership and various details of the foreign corporation that, among other disclosure requirements, include the country of its location, its balance sheet, its undistributed earnings and any transactions between the entity and the taxpayer. In the past, under Section 6038(b)(1), the IRS has assessed a substantial penalty for failure to timely file Form 5471.
The penalty is an initial $10,000 plus an additional $10,000 for each additional 30-day period that the failure to report continues.
When Alon Farhy, who controlled two foreign corporations, failed to file Form 5471, the IRS assessed substantial penalties. In an effort to avoid the penalties, Farhy took his case to the U.S. Tax Court (Farhy v Commissioner, 160 T.C. No. 6 (April 3, 2023)). The Tax Court concluded that the IRS does not have statutory authority to assess penalties under Section 6038. The court decision found that while Section 6021(a) generally permits the IRS to make assessments for penalties related to Sections 6671-6725 and 6654-6751, it does not include penalties related to Section 6038.
Therefore, the court found that the IRS did not have the statutory authority to enforce the penalty by merely issuing an assessment. It must do so through litigation, not a mere assessment.
Tax Court IRS lacked authority to assess Section 6038b penalties: PwC