Farhy Reminds the IRS to Turn Square Corners, Not Cut Corners by PHILIPP BEHRENDT
The recent case of Farhy v. Commissioner has brought attention to an essential aspect of the tax collection process – the assessment authority for penalties by the Internal Revenue Service (IRS). Ed Robbins, who argued this case on behalf of the taxpayer, explains the impact of this taxpayer’s victory in the latest volume of CCH’s Journal of Tax Practice & Procedure. A copy of this article is available below.
In this case, the IRS attempted to enforce penalties against a taxpayer for failings to file Form 5491. However, the Tax Court ruled that the penalties were not validly assessed because the IRS does not have assessment authority. This blog post explores the significance of assessments in tax collection and the implications of the Farhy case for taxpayers and the IRS. Also, the article provides an over of penalties to which the determination of missing assessment authority could extent.
Understanding Assessments in the Tax Collection Process:
An assessment is a pivotal event in a taxpayer’s tax liability journey, representing the IRS’s official determination of the amount owed. The Code grants the Commissioner of Internal Revenue the authority to make these assessments, which are recorded in the office of the Secretary according to rules and regulations prescribed by the Secretary. Importantly, an assessment is the trigger for the IRS’s unique collection powers under the Code.
The Farhy Case: Highlighting the Importance of Proper Assessments Authority:
Farhy v. Commissioner serves as a vital lesson for taxpayers and the IRS alike. The Tax Court ruled that without a valid assessment authority, the IRS’s administrative collection powers are non-existent. Consequently, the IRS cannot assess certain penalties and, thus, cannot proceed with collection actions against a taxpayer. The implications of this case extend to most foreign information penalties in Chapter 61 where the IRS lacks assessment authority. As a result, taxpayers facing such penalties should consider raising the issue of the IRS’s lack of authority and file a protective claim for a refund if they have already paid the penalty.
The Timely Appeal and Reminder for the IRS:
The IRS appealed the Fahry decision just before the appeal deadline expired.
However, this case serves as a poignant reminder to the IRS to strictly validate whether they have the proper assessment authority. The case underscores the importance of turning “square corners” in the tax collection process.
Farhy v. Commissioner highlights the critical role of assessments in the tax collection process. Taxpayers must be aware of their rights and protections under the law, and if facing collection actions by the IRS, you need to consult with a qualified tax professional. For the IRS, this case serves as a reminder to adhere to proper procedures, ensuring that assessments are conducted accurately and lawfully. By turning square corners and following the tax code’s letter and spirit, the IRS can foster a fair and transparent tax system that benefits both taxpayers and the government alike.