Legality Of Certain IRS Information Reporting Penalties at Issue in The Tax Court and Supreme Court by Edward M. Robbins, Jr.
Section 6038 Information Penalties
Simultaneous answering briefs were filed on November 8, 2022, with the Tax Court in the case of Farhy v. Commissioner (Docket No. 10647- 21L).[i] The sole issue pending is the IRS’ authority to assess and forcibly collect IRC Section 6038 penalties. Petitioner argues there is no specific assessment authority for 6038 penalties under the Code to trigger the IRS forced collection powers. Petitioner contends the appropriate collection authority lies in the IRS’ ability to forward the matter to the Department of Justice for a collection suit. The IRS claims, in effect, that the Section 6038 assessment authority may be found in the Code’s “emanations” of power that create “penumbras” of authority within which the IRS can operate even if not explicitly authorized in the Code, accordingly its collection powers remain.
Here the IRS erroneously assessed 6038 penalties pertaining to Forms 5471 for Petitioner. Chapters 63 and 68 of the Code give the IRS the authority to assess the foreign information penalties found in section 6677 and section 6679. But there is no corresponding authority in the Code giving the IRS the authority to assess the section 6038 series of foreign information penalties found in Chapter 61. Since the IRS cannot assess the penalties under the Code, the IRS must request the Department of Justice to sue the taxpayer in District Court to collect the penalties and reduce them to a judgment.
Practice Pointer: Consider Protecting Taxpayer’s Refund Statute
Those who have paid assessed section 6038 penalties should consult with a tax professional regarding filing a protective claim for refund to preserve the statute of limitations for a refund pending the outcome of the litigation. As the briefs were just filed, the Tax Court will need to consider the issue and issue its opinion, and I anticipate the matter will be ongoing for some time. Until the matter is decided with finality, refund statutes are running.
I note there is no statute of limitations in the Code for a refund of section 6038 penalties paid. The statute of limitations should be under 28 USC 2401(a), which states “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.” However, the IRS could make the argument from the 3rd Circuit in Bedrosian v. U.S. Dep’t of Treasury, 912 F.3d 144, 153 (3d Cir. 2018) that a claim for a return of monies paid toward an FBAR penalty is an action for refund of a tax- related penalty; therefore, the statute of limitations for recovering a Section 6038 penalty would be the same as the normal tax refund statute.
On November 2, 2022, the Supreme Court heard oral argument on whether a non-willful FBAR penalty can exceed $10,000 per form verses
$10,000 penalty per account. See United States v. Bittner (Supreme Court Docket No. 20-40597). The government claimed that the non- willful FBAR penalty was properly applied to each of the account holder’s foreign accounts. The assessment difference was $50,000 in total versus $2.72 million as assessed by the IRS.
Those who have paid non-willful FBAR penalties based on multiple accounts should consult with a tax professional regarding filing a protective claim for refund to preserve the statute of limitations for a refund.
IRS is required to follow the law as written, just like everybody else. The effort by the IRS falling back on an ipse dixit argument “It is, because I say it is” should be rejected.