Tax Court Decision Signals Penalty Refund Opportunity

IRS Form 5471 is used by taxpayers to report income from foreign corporations in which they have a controlling interest. Filing requirements are governed by IRC Section 6038(b), which lays out penalties for failing to file a timely form.

Although the 6038(b) penalty has been around for decades, the U.S. Tax Court ruled on April 4, 2023 that the IRS is not authorized to assess and administratively collect it. This opinion was based on the fact that the penalty is not associated with any type of tax payment and therefore does not fall under the definition of an “assessable penalty.”

This does not mean that the penalties were inaccurate, nor that the forms do not need to be filed in a timely manner. But it does appear to mean that taxpayers who have paid the penalty in the past may be eligible for a refund.

Refund claims must be filed within two years of the date the tax was paid, so taxpayers are advised to speak with their tax advisors as soon as possible if they believe they are affected.

Note that this ruling does not apply to penalties that are categorized as “assessable,” such as those incurred by failure to file information for certain foreign trusts and failure to file returns for foreign partnerships.

If you have any questions about this update or your own Form 5471 filing requirements, please contact your Grassi advisor or Frank Madigan, Senior Manager in our Tax Controversy practice, at or 516.336.2461.

Frank Madigan Frank Madigan is a Senior Manager in the Tax Controversy practice at Grassi. With more than 15 years of experience in public accounting and the IRS, he specializes in resolving tax controversy issues for corporations, pass-through entities and individuals and representing them before taxation authorities. He has advised clients on tax planning and compliance in a wide range of industries, including construction, healthcare, financial... Read full bio

Categories: Advisory, Tax Controversy