Over the last several years, one of the most significant disputes in international tax enforcement has been whether the Internal Revenue Service (IRS) may administratively assess and collect certain international information return penalties without first filing a lawsuit in court. The issue primarily arose in cases involving Form 5471 (foreign corporations), but it has broader implications for other international reporting forms and penalties. For taxpayers, the distinction is important. If a penalty is “assessable,” the IRS can generally use its ordinary collection tools – such as liens and levies – without first obtaining a court judgment. If a penalty is not assessable, the government may need to bring a civil action to collect it. A Ponte Vedra Beach, FL tax lawyer can help taxpayers understand their reporting obligations, evaluate the validity of international information return penalties, and develop strategies for responding to IRS examinations and collection efforts.
The Tax Court’s Decision in Farhy
The controversy began with the Tax Court’s decision in Farhy v. Commissioner. In that case, the taxpayer challenged penalties imposed under Internal Revenue Code §6038(b) for failing to file Form 5471. The Tax Court held that Congress had created the Form 5471 penalty but had not expressly authorized the IRS to assess it administratively. As a result, the court concluded that the IRS could not simply assess and collect the penalty through its normal administrative procedures. Instead, the government would need to pursue collection through a civil action. The decision surprised many practitioners because the IRS had assessed and collected these penalties administratively for decades.
The D.C. Circuit Reverses
The IRS appealed the decision in Farhy, and in May 2024 the United States Court of Appeals for the District of Columbia Circuit reversed the Tax Court. The D.C. Circuit held that the IRS has authority under the Internal Revenue Code to assess and administratively collect Form 5471 penalties. The court reasoned that the Code’s general assessment provisions, together with the structure of section 6038, authorized administrative assessment even though section 6038 does not explicitly use the word “assess.” This was a major victory for the government and restored the IRS’s long-standing position within the D.C. Circuit.
The Mukhi Case: Tax Court Pushes Back
The next major case was Mukhi v. Commissioner, another dispute involving Form 5471 penalties.
Initially, the Tax Court relied on its original Farhy reasoning and held that the IRS lacked authority to assess the penalties. After the D.C. Circuit reversed Farhy, the IRS asked the Tax Court to reconsider Mukhi. The Tax Court did reconsider – but remarkably reached the same conclusion. Sitting en banc, the court again held that section 6038(b) does not authorize administrative assessment of Form 5471 penalties. The court explained that because any appeal in Mukhi would go to the Eighth Circuit rather than the D.C. Circuit, it was not bound by the D.C. Circuit’s interpretation.
As a result, a circuit split appeared possible.
What Happened Next?
The IRS appealed Mukhi to the United States Court of Appeals for the Eighth Circuit. As of 2026, that appeal remains one of the key cases to watch because it could determine whether another circuit agrees with the Tax Court or joins the D.C. Circuit. Meanwhile, another case, Safdieh v. Commissioner, reached the United States Court of Appeals for the Second Circuit. In early 2026, the Second Circuit sided with the IRS and held that Form 5471 penalties are assessable and may be collected administratively. With both the D.C. Circuit and the Second Circuit now supporting the government’s position, the IRS currently has substantial appellate authority in its favor.
What About Form 3520 and Form 3520-A Penalties?
Many taxpayers assumed that if Form 5471 penalties were not assessable, the same reasoning would apply to penalties for Form 3520 and Form 3520-A, which involve foreign trusts and foreign gifts. However, the statutes are different.
In Mukhi, the taxpayer challenged both Form 5471 penalties and Form 3520/3520-A penalties. While the Tax Court agreed with the taxpayer regarding the Form 5471 penalties, it upheld the Form 3520 and Form 3520-A penalties imposed under section 6677. The court concluded that those penalties are authorized under a statutory framework that permits assessment and collection by the IRS. As a result, taxpayers generally have had much less success challenging the IRS’s authority to assess Form 3520 and Form 3520-A penalties.
The IRS’s Current Position
The IRS continues to maintain that penalties for Form 5471 and similar international information returns may be assessed administratively. Following the D.C. Circuit’s reversal in Farhy, the government aggressively pursued reconsideration and appeals in other cases. The agency’s litigation position remains that the general assessment authority contained in the Internal Revenue Code permits administrative assessment of these penalties. Practically speaking, taxpayers should assume that the IRS will continue to assess these penalties and that challenges based solely on the original Tax Court Farhy decision face increasingly difficult odds. While the Eighth Circuit’s eventual decision in Mukhi could still influence the landscape, the trend in the appellate courts currently favors the government.
Bottom Line
The law is no longer where it stood immediately after the Tax Court’s original Farhy decision. The D.C. Circuit and Second Circuit have both concluded that Form 5471 penalties are administratively assessable, while the Tax Court has continued to disagree in cases appealable elsewhere. Form 3520 and Form 3520-A penalties generally stand on firmer statutory footing and have largely survived similar challenges. Unless additional circuits adopt the Tax Court’s view – or the issue ultimately reaches the Supreme Court of the United States – the IRS likely holds the stronger position in the appellate courts regarding its authority to assess and collect these international information return penalties without first obtaining a court judgment.
Crepeau Mourges has significant experience representing taxpayers facing international information penalties. We are well-versed in compliance options and strategies designed to mitigate exposure both before and during audit or investigation by the government. Call us today for a free consultation.
