For US expats who own businesses in foreign countries and need to file Form 5471, the recent Farhy v. Commissioner decision by the US Tax Court may be of interest. On April 3, 2023, the U.S. Tax Court made a decision in Farhy v. Commissioner regarding penalties for failure to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This decision has implications for U.S. expats who own businesses in foreign countries and need to file this complicated form.
In the case, Alon Farhy owned two Belize corporations from 2003 to 2010, but did not file Forms 5471 for either corporation, despite being required to do so. In November 2018, the IRS assessed penalties of $10,000 per failure to file, per year, and a continuation penalty of $50,000 for each year. However, the U.S. Tax Court ruled that the Internal Revenue Code does not authorize the IRS to assess these penalties, and therefore the IRS cannot collect them via levy.
While this ruling may lead some taxpayers to consider filing refund claims for penalties previously assessed and paid under Section 6038(b), it is unclear whether this case creates a right to a refund. Additionally, it is important to note that the case does not relieve the obligation to file Form 5471 or any other required form. Failure to file certain international information returns, such as Forms 5471 and 5472, may impact the limitations period on a taxpayer’s return, and this case does not change that rule. U.S. expats who own businesses in foreign countries should be aware of the requirements for filing Form 5471 and consult with a tax professional to ensure compliance with all applicable tax laws.
Need help with US expat taxes? Our expert tax professionals provide free email advice. Contact us for answers to your questions about double taxation and reducing your tax liability. We’re here to help you navigate international tax laws. Have a question? Contact Olivier Wagner, 1040 Abroad.