Form 5471 Victory for Taxpayers

The Tax Court's recent decisions in Mukhi v. Commissioner and Safdieh v. Commissioner have reaffirmed its stance against the IRS's authority to assess certain penalties, despite opposition from the DC Circuit Court of Appeals. These cases specifically address penalties related to failing to file Forms 5471 for ownership of non-US corporations and partnerships.

The Mukhi case involved a taxpayer who formed a non-US corporation in 2001 and intentionally failed to file required Forms 5471 from 2002 through 2013. Despite the taxpayer's guilty plea to criminal tax violations, when the IRS attempted to assess civil failure-to-file penalties under Code § 6038(b), the Tax Court sided with the taxpayer, following its previous ruling in Farhy v. Commissioner that the IRS lacked statutory authority for such assessments.

The Tax Court's position rests on a careful reading of the law. While Code § 6201(a) authorizes the IRS to assess "taxes, interest, additional amounts, additions to tax, and assessable penalties," Code § 6038(b)(1) notably lacks specific language authorizing the IRS to assess failure-to-file penalties. The Tax Court emphasized this distinction by comparing it to other penalty provisions that explicitly grant assessment authority to the IRS.

The IRS argued that without assessment authority, these penalties would become practically uncollectible. However, the Tax Court disagreed, pointing to 28 U.S.C. § 2461(a), which provides that penalties can be collected through civil actions in federal district court when no specific collection method is specified in the statute. While this makes enforcement more challenging for the IRS, the Tax Court maintained that administrative convenience cannot override clear statutory text.

The Tax Court's decisions follow its Golsen doctrine, which allows it to maintain its own precedent unless overruled by the Supreme Court or convinced by additional appellate opinions to change course. Since the Mukhi case would be appealed to the Eighth Circuit, which hasn't ruled on this issue, the Tax Court wasn't bound by the DC Circuit's contrary decision in Farhy.

For taxpayers, these decisions provide a significant opportunity. Those facing Form 5471 failure-to-file penalties—unless they reside in the DC Circuit's jurisdiction—may successfully challenge such assessments by following the post-assessment conference and Tax Court petition procedures demonstrated in Mukhi. This is particularly relevant for taxpayers who may have failed to file Forms 5471 for reasons unrelated to tax avoidance.