Administratively, the IRS continues to devote significant resources to catching taxpayers who have failed to properly file international information returns (e.g., Forms 5471, Forms 8865, Forms 3520, etc.). Don’t believe me? Just look at the uptick in federal court cases associated with these information returns and the IRS’ attempts to assess civil penalties against taxpayers who have not timely filed.
For example, the Western District of Texas only months ago issued its decision in Colliot v. U.S., No. 1:19-cv-212-LY (W.D. Tex. Mar. 24, 2021). In that case, the IRS sought to impose over $400,000 of civil penalties against a taxpayer for his failure to file Forms 5471 and Forms 8865 for 6 years under section 6038 of the Code. Only months later, the United States Tax Court issued its memorandum opinion in Kelly v. Comm’r, T.C. Memo. 2021-76, which also involved a taxpayer’s non-failure of Forms 5471 under section 6038. However, in that case, the IRS was not attempting to impose civil penalties against the taxpayer—rather, the IRS was attempting to utilize section 6038(c)(8) and its extension of the general three-year statute of limitations period for assessment indefinitely until a taxpayer files the Form 5471.
Not only do these two decisions provide support that section 6038 issues are here to stay, they also offer some lessons and insights to taxpayers who are attempting to defend against civil penalties under section 6038. Accordingly, these two decisions are discussed in more detail below.