The U.S. Tax Court today ruled that the IRS did not have authority to assess penalties under section 6038(b) against a taxpayer who willfully failed to file Form 5471 for his 2003–2010 tax years. As a result, the IRS could not proceed with collection of such penalties from the taxpayer via the proposed levy.
It is important to note what the court ruled.
A. Section 6038(b)(1) imposes a $10,000 penalty for failure to timely file form 5471
B. Section 6038(b)(2) imposes additional penalties of $10,000 each 30 days up to $50,000.
C. Section 6201(a) authorizes The Treasury to assess taxes (including interest, and assessable penalties).
In this case, the IRS assessed $50,000 in 5471 penalties against the taxpayer then sought to collect the amount by levying on a bank account. The taxpayer challenged the action, claiming that the penalty was not an “assessable penalty” under Section 6201(a), meaning that the IRS could not assess it to begin with, making the entire collection action illegal
The Tax Court ruled for the taxpayer and held that the $10,000 penalty related to Form 5471 was not an assessable penalty. The consequences are that the IRS may not assess and enforce 5471 penalties. If they want to enforce the penalty, they must file a civil lawsuit to do so. In reality, the IRS will rarely do so for a small debt.
For court ruling, see https://drive.google.com/file/d/16FKmRDFTNjXRd88mdt_yAB8iNbe8JeLg/view?usp=share_link