Tax Blog

As discussed in-depth in a previous post, there is an ongoing fight between the Tax Court and the IRS over whether the penalties imposed under IRC § 6038 for failing to comply with international reporting requirements relating to foreign assets actually have any real teeth. Essentially, the dispute centers on whether these penalties are “immediately assessable” – i.e. whether the IRS can assess the penalty without first having to obtain a court judgment.  That assessment, in turn, records a taxpayer’s liability and triggers the broad collection powers of the IRS, raising fundamental due process concerns, among others.

As a quick recap, IRC § 6038 imposes penalties on taxpayers who fail to provide required information regarding their ownership of foreign assets.  The penalties begin at $10,000 and can increase by up to $50,000 if the failure continues after the IRS notifies the taxpayer and the noncompliance is not timely corrected.

The Tax Court, however, in Farhy v. Commissioner, 160 T.C. 399 (April 3, 2023), held that the IRS lacked the authority to assess the IRC § 6038 penalty without obtaining a court judgment.  In so doing, the Tax Court pointed to the text of the statute, which lacks the requisite language for penalties imposed under that Code section to be “assessed and collected in the same manner as taxes.”  The Tax Court doubled down on this view in Mukhi v. Commissioner, 162 T.C. 177 (April 8, 2024). A quick one-two punch by the Tax Court, round goes to the taxpayers.

 The IRS landed a punch back in a win on appeal at the D.C. Circuit Court of Appeals, which reversed the Tax Court’s decision in Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024), pointing to Congressional legislative history of IRC 6038 as evidence of Congress’ intent for these penalties to be enforceable without Court approval. 

Recently, the IRS won an appeal of a summary judgement order by the Tax Court in Safdieh v. Commissioner, 169 F.4th 102 (2d Cir. 2026).  The Second Circuit court agreed with the D.C. Circuit that the IRC § 6038 penalties are immediately assessable, based on the legislative history, purpose, and structure of IRC 6038. This was a significant blow to the Tax Court’s position on IRC § 6038 as expressed in Farhy and Mukhi.    

With the Second Circuit joining the D.C. Circuit, the fight between the Tax Court and the IRS over the authority to assess penalties under IRC § 6038 becomes a jurisdictional one.  For taxpayers subject to the authority of those two circuit courts, the IRC § 6038 penalties are a short assessment notice away.  For those outside of those circuits, hope remains that the Tax Court will continue to follow Farhy and require the IRS to show its work before seizing assets.  For all taxpayers though, proper documentation remains key, proper disclosure a must, and a healthy concern for the implication of IRC § 6038 and the circuit court trend remains necessary.  All taxpayers with foreign assets should consider these implications when consulting with their tax advisers.  Whether the Tax Court can go the distance remains to be seen, but, much like the Rocky franchise, this fight appears destined for several more sequels.