Tax Court Reaffirms IRS Cannot Assess Certain Penalties
In Mukhi v. Commissioner, 163 T.C. No. 8 (2024), the U.S. Tax Court reaffirmed its earlier decision that the IRS lacks statutory authority to assess penalties under Internal Revenue Code §6038(b)(1) for failing to report ownership in foreign corporations. This ruling contrasts with a D.C. Circuit decision in another case, creating a divide in the interpretation of the IRS’s authority to assess certain international information return penalties.
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The court rejected the IRS’s motion to reverse its position, citing the lack of explicit statutory language authorizing the assessment of these penalties. It emphasized that Congress deliberately limited the IRS’s authority to assess penalties during the 1954 recodification of the tax code.
This case involved nearly $11 million in penalties against Raju Mukhi for failing to file required international reporting forms, including Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, over several years. While the Tax Court upheld other penalties for foreign trust reporting violations, it reiterated that the IRS could not assess §6038(b)(1) penalties administratively.
This decision has significant implications for taxpayers, as it limits the IRS’s ability to impose certain penalties without court involvement. The conflicting court rulings may lead to further judicial review or legislative action to clarify the IRS’s authority. If you’d like to discuss how to report for foreign corporations, contact our team at (410) 497-5947 or schedule a consultation.
