IRS Can't Impose Form 5471 Penalties, Court Rules - What You Can Do Now

U.S. taxpayers who are officers, directors, or shareholders of foreign corporations may be required to file Form 5471. Failing to file Form 5471 triggers a significant tax penalty on the taxpayer – that is, until a recent Tax Court decision Farhy v. Comm’r. On April 3, 2023, the Tax Court ruled in Farhy v. Comm’r that the Form 5471 penalty provision, located at section 6038(b) of the Internal Revenue Code, did not technically authorize the IRS to assess the penalty against taxpayers – that is, to formally record the penalty. The penalty for failing to timely file this form is $10,000 for each year but can go up to $50,000 per year if the IRS notifies you of your failure to file, and you still fail to file the form. So, what is the impact of this recent court decision? If the IRS is investigating whether you are subject to a penalty related to late filing or failure to file Form 5471, you now have a way out. And if you’ve already paid a penalty for late filing Form 5471, you can potentially seek a refund. If the IRS is seeking to impose these types of penalties against you, or if you’ve paid these penalties in the past, reach out to competent tax counsel to explore your options.

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