Right Right Now is a Good Time to Fix Your Form 5471 ProblemsApril 14, 2023 - Phil HodgenForm 5471, Minimultinationals
Update, Prophesy, and Exhortation
This week’s post is shorter than usual. I deliver here an Update, a Prophesy, and an Exhortation.
- Update. A very recent Tax Court case opened up a wormhole in the tax universe space-time continuum. (Translation: the IRS lost an important case).
- Prophesy. The wormhole will close, and the IRS will assemble Multitudes to afflict the weary. (Translation: Congress will fix the problems and the IRS will spend new billions on new people armed with new weapons to collect taxes from you).
- Exhortation. Fix your late Forms 5471, 5472, 8865, 8938, and 926 problems now. Take care of other filing failures while you’re at it. (Translation: the IRS is temporarily on the back foot. This will change. Take advantage of the confusion, grab the gold, and head for safety).
Update: Important Tax Court Case
The IRS lost an important Tax Court case: Alon Farhy v. Commissioner, 160 T.C. No. 6 (April 3, 2023). (Opinion here as HTML) (Official Tax Court PDF).
Ed Robbins argued and won the case for the taxpayer. I know and like Ed. I’ve sent him referrals in the past and will again. If you have a beef with the government that might cost you time away from home or (slightly better) a great deal of money. Put Ed on your short list of lawyers to hire.
The IRS Cannot “Assess” Form 5471 Penalties
The Tax Court ruled that the IRS does not have the authority to assess and collect Form 5471 penalties.
That may sound like a word game to a someone who is not initiated into the priesthood of tax law, but trust me — this is big.
Assessment: Power Granted by Congress
The normal way that the IRS collects penalties is by saying “You owe a penalty!” and then going through its standard toolkit of collection techniques: garnish your wages, put a lien on your house, grab your bank account, etc.
The government’s ability to announce you owe penalties (and tax) is called “assessment” in the trade. The IRS “assesses” your debt of tax, penalties, and interest to the United States of America.
The IRS is given legal authority to do this by Congress. Explicitly in the Internal Revenue Code, penalty by penalty.
If you don’t like this and you think the IRS is wrong to impose penalties on you, well . . . go push water uphill with a rake. That’s how it looks from the government’s side of the table, anyway.
Congress Didn’t Give Power to Assess Form 5471 Penalties
Ed Robbins pointed out to the Tax Court that if you look at what Congress said about Form 5471 penalties (in IRC §6038(b)) Congress did not grant power to the Secretary of the Treasury (mothership of the IRS) to assess penalties for failure to file Form 5471.
The Tax Court agreed.
This means the IRS cannot just say you owe Form 5471 penalties and make you pay — just on their say-so.
The IRS Must Sue You to Collect Form 5471 Penalties
If the IRS can’t just say “You owe penalties” (“assessment”) and grab your stuff, what remedy do they have if you didn’t file a Form 5471 and they want to Make You Pay?
Simple and time-honored. The United States of America sues you in Federal Court.
This sounds scary, until you think for a minute.
The Department of Justice is not going to file a lawsuit to collect $10,000 — the amount of the baseline Form 5471 penalty. That’s chickenfeed, and winning a $10,000 judgment against you will not enhance the career opportunities of the government lawyer who handled the case.
And yes I know that Form 5471 penalties can pyramid up to the sky. That’s what happened to Ed’s client.
So the likelihood that you will get sued by the IRS for Form 5471 penalties right now is approximately zero.
There are only so many lawyers on payroll at the Department of Justice. They have many things other than $10,000 Form 5471 penalty cases.
Prophesy: This, Too, Shall Pass
This state of affairs will not last forever.
My guess is that Serious Discussions are occurring even now for Congress to pass a law to override the Tax Court decision.
Congress moved with surprising alacrity when the IRS lost the Grecian Magnesite case (hot tip: Michael Miller).
Not only that, but As You All Know, Congress gave the IRS a ton of money to hire more people and buy better computers.
The avowed aim of our new IRS Commissioner is to hire so, so many people, and invest in so, so much better tech.
Then, the IRS will use those people and that tech to go after businesses (hey! companies have to file Form 5471 for their foreign subsidiaries) and wealthy individuals (hey! these people frequently have investments abroad in foreign corporations and forget to file Form 5471, like Mr. Farhy!) and normal Americans living normal lives abroad who own and operate boring mom and pop businesses as corporations (Form 5471 again!).
Governments are Made of People
Not that I’m a doomer about all of this. There is no “government” and there is no “IRS.” “Government” is just people.
More people and better tools might make things better, or they might make things worse. Hard to tell. People are fallible. Even the people who happen to get paychecks from the IRS. The Iron Law of Subtractive Intelligence (name coined by me) will be at play.
Every bureaucracy gets incrementally dumber with the addition of each new employee, even if the employee is a genius.
Thirty thousand more people on the payroll at the IRS will make things slower, not faster. Reason: communications costs increase exponentially with the addition of each new node in a network.
So again, don’t be a doomer. EGBOK.
Listen. I know what it’s like to be behind the tax 8-ball.
I, your trusted servant and guide, had at one point in my life (as a licensed lawyer, which I still am) intended to but hadn’t quite actually filed several years of personal income tax returns.
I had no idea how much tax I would owe, and I didn’t want to know, so I didn’t file the late tax returns. For years. Me? I filed my late income tax returns with help from a friend, got on an installment plan, and paid off my tax debt.
Two Skillsets You Need
When you fix a tax problem, you need two skill-sets:
- Someone to prepare bulletproof tax returns: can you explain every number on that late tax return to a skeptical revenue agent and win?
- Someone to do battle with the IRS on penalties and help you dive into the pool with only a small splash (translation: file your late tax returns with as small a risk of penalties as possible).
We Don’t Do Controversy Work
On the second bulletpoint, we stopped doing controversy work several years ago. (“Controversy work” for non-lawyers is a description of the tax lawyer practice niche where you fight the IRS on collections, penalties, and prison).
We had two reasons for stopping:
- There are other people (like Ed Robbins and everyone in his firm) who have experience and wisdom that I cannot replicate in my lifetime. Let them do what they do well.
- Dealing with the IRS made us angry and sad. (This is when I started to understand the Law of Subtractive Intelligence).
I know a number of top-tier tax controversy lawyers who can help you through this process. Email me and I will and match you up with someone.
We Are Great Technicians But Expensive
On the first bullet point (get someone who can create bullet-proof tax returns for you) we are well-suited to do the job. But we are expensive. We are top-tier but there are other top-tier people out there, too.
Email me and I will and try to match you up with someone who is more cost effective but excellent.
The IRS is temporarily on a back foot. They cannot assess several international penalties for failure to file a variety of forms.
This is a curiosity that will not last.
If you have a mess, take advantage of the opportunity. Fix it.
See you next week.