Skip to content

The Continued Rise and Fall of Penalties

Apr 19, 2023

By Miri Forster

We do know a couple of things: The issues are typically complex, the stakes often high, but when it comes to court rulings, Yogi Berra perhaps said it best: “It ain’t over ‘til it’s over.” In a previous article, we reviewed top areas of IRS interest – since that publication significant developments have occurred in the area of penalties.

I.  FBAR Penalties

Bittner v. United States

For years, the IRS has imposed $10,000 non-willful FBAR penalties on a per foreign account basis when an account is not properly reported on an FBAR. Taxpayers have now scored a huge victory in Bittner v. United States, where the Supreme Court ruled that, under the Bank Secrecy Act, the non-willful failure to file an FBAR report is calculated as one annual violation with a maximum penalty of $10,000 per year, rather than on a per foreign financial account basis.  The Supreme Court distinguished the facts in Bittner from willful violations, where penalties are applied on a per-account basis and calculated as the greater of either $100,000 or 50% of the amount in the account at the time of the transaction. 31 U.S.C. 5321(a)(5)(C)(i).


  • The decision in Bittner is limited to non-willful failures.
  • A U.S. person with a financial interest in, or signatory authority over, one or more foreign financial accounts with an aggregate value of more than $10,000 at any time during a calendar year is still required to annually report those accounts on FinCEN Form 114 (the Report of Foreign Bank and Financial Accounts).
  • Taxpayers that have paid non-willful FBAR penalties of more than $10,000 may be eligible to claim a refund for the difference. Special attention should be paid to settlement agreements involving non-willful FBAR penalties to determine  whether the language limits a person’s ability to claim a refund. 
  • Taxpayers that have been assessed multiple FBAR penalties should request abatement.

II.  International Information Return Penalties

Farhy v. Commissioner

In another significant taxpayer victory, the U.S. Tax Court in Farhy v. Commissioner, 160 T.C. 6 (April 3, 2023), held the IRS may not automatically assess penalties under IRC Sec. 6038 for failure to file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations). Without a valid assessment, the IRS is not permitted to use its administrative levy powers to collect the penalty despite the taxpayer’s willful failure to file Form 5471.

Penalties are automatically assessed by IRS services centers upon receipt of a Form 5471 attached to a late filed Form 1120 (U.S. Corporation Income Tax Return) or Form 1065 (U.S. Return of Partnership Income).  Farhy  impacts the IRS’s ability to make automatic penalty assessments and how the IRS may pursue collection of those penalties in the future.

Executive Summary:

Mr. Farhy wholly owned two foreign corporations incorporated in Belize. For years 2003 through 2010, taxpayer failed to report his interest in the foreign corporations on Forms 5471. The IRS mailed notice to the taxpayer to file the outstanding Forms 5471. Taxpayer willfully failed to comply without reasonable cause. As a result, the IRS assessed a $10,000 initial penalty per year for failure to file under IRC Sec. 6038(b)(1) and a $50K continuation penalty per year under IRC Sec. 6038(b)(2) for continuing the failure after notice and request by the IRS. 

The IRS proposed a levy to administratively collect the international information penalty. Taxpayer participated in a collection due process hearing to halt levy action, which was decided in favor of the IRS. Subsequently, taxpayer filed suit in U.S. Tax Court on the basis that penalties are not automatically assessable under IRC Sec. 6038. 

The Tax Court held that penalties under IRC Sec. 6038 for failure to file Form 5471 are not automatically assessable as there is no statutory provision in the Internal Revenue Code that specifically authorizes their assessment. Assessment is the formal recording of a taxpayer’s tax liability. When a tax is assessed, the IRS may take certain actions to collect the tax administratively. The absence of an assessment prevents the IRS from administratively collecting the tax. The Tax Court noted, however, the Department of Justice could pursue Form 5471 late filing penalties under IRC Sec. 6038 through a civil action.


  • Taxpayers must still file international information returns. The Farhy ruling does not change the obligation to file Form 5471 or any other international information return.
  • Failure to file an international information return may still extend the statute of limitations on a taxpayer’s return under IRC Sec. 6501(c)(8).
  • While not certain, the Farhy ruling may extend to other international information return penalties (see discussion below).
  • The IRS is likely to appeal the Tax Court decision. In the meantime, taxpayers that have paid international information penalties should consider whether to file a protective refund claim.
  • Additional action steps may be appropriate for pending penalty abatement requests or refund claims related to late-filed or incomplete international information returns.

Does Farhy Extend to Other International Information Reporting Penalties?

While not certain, the Farhy ruling may extend to the following other international information reporting penalties:

  • Forms 5471 (for certain foreign corporations) under IRC 6038, 6038A and 6038C.
  • Forms 5472 (for certain foreign-owned U.S. corporations) under IRC 6038A and 6038C.
  • Forms 8865 (for transfers to certain foreign partnerships) under IRC S 6038 and 6038B.
  • Forms 8858 (for certain foreign disregarded entities) under IRC 6038.
  • Forms 926 (for certain transfers to foreign persons) under IRC 6038B.
  • Forms 8938 (regarding foreign financial accounts) under IRC 6038D.
  • Forms 8992 (US Shareholder GILTI calculation) under IRC 6038.
  • Forms 3520 (for foreign gifts) under IRC 6039F.

In contrast, the Internal Revenue Code does provide statutory authority to assess penalties on the following international information returns and Farhy does not change the rule for these forms:

  • Forms 3520 and 3520-A (for reportable events for foreign trusts) under IRC 6048, with penalties imposed under IRC Sec. 6677.
  • Form 5471, Schedule O (for acquisitions and dispositions of an interest in a foreign corporation) under IRC 6046, with penalties imposed under IRC Sec. 6679.
  • Form 8865 (for acquisitions or dispositions of an interest in a foreign partnership) under IRC 6046A, with penalties imposed under IRC Sec. 6679.

Wrzesinski v. United States

In a quick turn of events, the government has conceded a district court case filed in September of 2022 and has agreed to refund international information penalties paid for the late filing of Forms 3520.

In Wrzesinski v. United States, taxpayer challenged a penalty under IRC Sec. 6039F for failure to timely file Form 3520 to report a foreign gift from his mother.  In 2010, his mother, a citizen and resident of Poland, won the lottery and gifted her son $830,000 over a two-year period.  The son asked and was informed by his U.S. tax preparer there was no need to report the gift on his U.S. tax return. 

Years later, taxpayer wanted to send some winnings back to his godson in Poland.  He performed online research and first learned that foreign gifts over $100,000 require the filing of Form 3520.  He confirmed this new knowledge with a U.S. attorney with international tax expertise, and then voluntarily filed the outstanding Forms 3520, along with a statement to request waiver of penalties for late filing based on reasonable cause.  In response, taxpayer received IRS notices assessing $207,500 in penalties for the late filed Forms 3520 (calculated at 25% of the foreign gifts received).  Taxpayer requested abatement based on reasonable cause but the Service claimed that taxpayer did not act with ordinary business care and prudence and that ignorance of the tax laws does not qualify as reasonable cause.  


The government concession is great news for Mr. Wrzesinski. The concession occurred before trial, so the district court did not have an opportunity to rule on whether taxpayer’s reliance on his advisor was reasonable. We can assume that if the government thought it had a strong position, it would have proceeded to trial.  Nonetheless, the lack of an issued opinion does not provide precedent for other taxpayers to rely on. 

Currently, there is limited precedent on international information return penalties.  One case is Kelly v. Commissioner, T.C. Memo. 2021-76, where taxpayer informed his experienced tax preparer of ownership in a Cayman entity but did not file Form 5471 based on his tax preparer’s advice. The Court determined that taxpayer’s reliance on the tax preparer was reasonable. The Court emphasized the tax preparer’s failure to advise Mr. Kelly to file Form 5471 was not the result of a conflict of interest or a “too good to be true” scenario.  The IRS recently filed a Notice of Appeal with the Ninth Circuit, so this is an important case to watch.


What's on Your Mind?

a person in a green dress

Miri Forster

Miri Forster, National Leader of the Tax Controversy & Dispute Resolution practice group, has over 20 years of experience providing tax dispute resolution services to public and private corporations, partnerships and high net worth individuals on a wide range of technical and procedural issues.

Start a conversation with Miri

Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.