Tax Court Decision may hamper IRS penalty collection for controlled corporations and partnerships

April 3, 2023

The Tax Court today may have thrown a wrench in the gears of the IRS penalty process for controlled foreign entities. In a reviewed decision (160 TC No. 6), the Tax Court held that the $10,000 penalty for failing to timely file Form 5471 provided by Sec. 6038(b) is not "assessable" by the IRS, and cannot be collected under the usual IRS administrative procedures.

The opinion does not mean that the penalties no longer apply. Judge Marvel's opinion says the penalty "may be collected through a civil action." But it does mean that - assuming the IRS does not successfully appeal the decision - the current system for penalizing late foreign filings is no longer operative. It may also create refund opportunities for taxpayers who have been penalized.

The taxpayer in this case was penalized for not filing Forms 5471, which reports interests in controlled foreign corporations. Sec. 6038(b) also covers Form 8865, relating to controlled foreign partnerships.

Ben Peeler, head of the Eide Bailly Tax Controversies team, commented, “the IRS has been abating many of these penalties so might not have too broad an affect, but will definitely affect currently assessable penalty notices or force a quick statutory change and corrections for previously assessed penalties."

Watch Eide Bailly Tax News & Views for additional coverage, or contact your Eide Bailly tax professional to learn more.


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