Taxpayer Wins Form 5471 Penalty Case

In the case of Mukhi v. Commissioner (163 T.C. No. 8, November 18, 2024), the U.S. Tax Court ruled that the IRS lacks the authority under Code Section 6038(b)(1) to impose an assessment for failure to file Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations). While Code Section 6038(b)(1) provides for a penalty of $10,000 annually for such failures, the court emphasized that the IRS cannot enforce this penalty through an administrative assessment; instead, enforcement must proceed through a civil action.

During an IRS examination, the taxpayer, Mr. Mukhi, submitted delinquent Forms 5471 under protest for foreign corporations he had established. Despite this, the IRS assessed $120,000 in penalties under the aforementioned Code section. Upon challenge, the Tax Court concluded that the IRS’s assessment was not legally permissible and reaffirmed that penalties under Section 6038(b)(1) require judicial enforcement.

The complexity of reporting obligations involving foreign entities often leads U.S. taxpayers to unintentional non-compliance with penalties. While the $10,000 per year penalty under section 6038(b)(1) remains unchanged, the enforcement mechanism per Mukhi now requires the IRS to pursue civil action rather than administrative assessment. The IRS will likely disagree with the decision in Mukhi and will continue to systemically assess penalties for late-filed forms 5471. The decision remains a hazard of litigation for the IRS, which will likely lead to more settlements.  

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