In Farhy v. Commissioner, 160 T.C. 399 (2023), TN here and GS here, the Tax Court held in a CDP case that collection efforts for the § 6038(b) penalties for initial and continuation failure to file Forms 5471 were not authorized because there was no assessment authority for § 6038(b) penalties. Section 6038(b) is here. Assessments are required for IRS collection actions such as liens and levies, thus the collection action failed.
My comments:
1. I find the Farhy holding odd; indeed, I think it is wrong. The statute is clear that Congress intended the § 6038(b) penalties to apply. The penalty for the initial failure seems to be automatically imposed by the statute's literal terms without any action by the IRS. § 6038(b) (“If any person fails to furnish, within the time prescribed under paragraph (2) of subsection (a), [the Form 5471] such person shall pay a penalty of $10,000 for each annual accounting period with respect to which such failure exists.”) There is no authority—and the Tax Court in Farhy cites none—for the proposition that Congress intended to exclude the § 6038(b) penalty from usual IRS collection tools. Instead, at best, the Tax Court finds a footfault in the interlocking statutory provisions.
2. The Code treats penalties as taxes, and 6201(a), here, authorizes
“assessments of all taxes (including
interest, additional amounts, additions to the tax, and assessable penalties)
imposed by this title.” (Emphasis
supplied by JAT.) “Including” at least suggests that, so long as the tax
(penalty) is imposed by Title 26, assessment authority can include more
than the types of liabilities specifically listed. More importantly, it would
not facially exclude the § 6038(b) penalties and should be capacious enough to
cover the § 6038(b) penalties, particularly because there is no reason to think that Congress
intended otherwise.
3. An assessment is simply a recording on the IRS books that a taxpayer owes a liability. In Hibbs v. Winn, 542 U.S. 88, 100 (2004), here, the Supreme Court described assessments (cleaned up):
As
used in the Internal Revenue Code (IRC), the term “assessment” involves a
recording of the amount the taxpayer owes the Government. 26 U.S.C. §6203. The
“assessment” is essentially a bookkeeping notation. Section 6201(a) authorizes
the Secretary of the Treasury “to make . . . assessments of all taxes . . .
imposed by this title.” An assessment is made “by recording the liability of
the taxpayer in the office of the Secretary in accordance with rules or
regulations prescribed by the Secretary.” §6203. n2 See also M. Saltzman, IRS
Practice and Procedure ¶10.02, pp. 10-4 to 10-7 (2d ed. 1991) (when Internal
Revenue Service signs “summary list” of assessment to record amount of tax
liability, “the official act of assessment has occurred for purposes of the Code”).
n. 2 Section 301.6203-1 of the
Treasury Regulations states that an assessment is accomplished by the
“assessment officer signing the summary record of assessment,” which, “through
supporting records,” provides “identification of the taxpayer, the character of
the liability assessed, the taxable period, if applicable, and the amount of
the assessment.” 26 C.F.R. §301.6203-1 (2003).
If the statute says a delinquent filer is subject to the penalty, it makes no sense that the IRS can’t record the liability on its books—easily meeting the definition of an assessment. And, what logic is it that the IRS cannot record on its books a clear liability such as § 6038(b)?
