IRS Notches Another Victory in Safdieh on IRS Form 5471 Penalty

Federal tax law requires U.S. persons to report their international activities on information returns. With increasing globalization, more U.S. citizens and residents are finding themselves in the IRS’s crosshairs concerning these reporting requirements. Indeed, the agency continues to strictly enforce these return obligations by seeking penalties against non-filers.

Reasonable cause remains a primary defense against late-filing penalties. But with the IRS interpreting reasonable cause more strictly in their favor, taxpayers are resorting to more creative penalty defenses. For example, in Farhy v. Comm’r, 160 T.C. 399 (2023), a taxpayer convinced the United States Tax Court (Tax Court) to abate late-filing penalties associated with IRS Form 5471 based on procedural grounds. Although the Tax Court’s decision was later reversed by the United States Court of Appeals for the D.C. Circuit (D.C. Circuit) in Farhy v. Comm’r, 100 F.4th 223 (D.C. Cir. 2024), the Tax Court reaffirmed its central holding that the IRS may not assess IRS Form 5471 penalties in Mukhi v. Comm’r, 163 T.C. 150 (2024), for taxpayers who resided outside the D.C. Circuit. More recently, however, the United States Court of Appeals for the Second Circuit (Second Circuit) agreed with the D.C. Circuit in Safdieh v. Comm’r, No. 25-501-cv (2d Cir. Feb. 27, 2026). The Safdieh decision may ultimately upend this defense entirely.

Farhy v. Comm’r

In Farhy, the Tax Court held that the IRS lacked the statutory authority to assess late-filed IRS Form 5471 penalties. Focusing primarily on the relevant statutory language, the court found that the IRS Form 5471 penalty was not an assessable penalty and therefore not assessable by the IRS under normal assessment procedures. The court indicated that it was “loath to disturb . . . [the] well-established statutory framework . . . [of the Internal Revenue Code] by inferring . . . [that the IRS had the] power to administratively assess and collect Section 6038(b) civil penalties when Congress did not see fit to grant that power to the Secretary of the Treasury as it did for other penalties of the Code.” According to the Tax Court, the government was required to assess and collect the penalty through civil litigation under another provision—28 U.S.C. § 2461—which provides a catchall for the government to collect “fines, penalties, or pecuniary forfeitures” not subject to an Act of Congress.

The Tax Court’s decision in Farhy was short lived. On May 3, 2024, the D.C. Circuit reversed the Tax Court. See Farhy v. Comm’r, 100 F.4th 223 (D.C. Cir. 2024). According to the circuit court, the relevant IRS Form 5471 penalty provision had to be read in light of that provision’s “text, structure, and function.” The court held that all of these supported the IRS’s contention that it had the statutory authority to assess the IRS Form 5471 penalty similar to other penalties in the Code.

Mukhi v. Comm’r

When a circuit court of appeals reverses the Tax Court, the Tax Court reexamines its reasoning in a subsequent case where the same issue is raised but appealable to a different circuit court. In Mukhi, a taxpayer raised the Farhy defense to a late-filed IRS Form 5471 penalty in a case appealable to the United States Court of Appeals for the Eighth Circuit. In that case, the Tax Court again held that the IRS lacked statutory authority to administratively assess the IRS Form 5471 penalty—i.e., that the government was required to initiate a civil lawsuit against the taxpayer under 28 U.S.C. § 2461.

Safdieh v. Comm’r

Shortly after Mukhi, the Tax Court granted summary judgment in favor of the taxpayer, concluding that the IRS had improperly assessed IRS Form 5471 penalties. See Safdieh v. Comm’r, No. 11680-20L (Dec. 5, 2024). The government appealed the Safdieh decision, and on February 27, 2026, issued its opinion.

Similar to the D.C. Circuit’s decision in Farhy, the Second Circuit held in favor of the IRS. According to the Second Circuit, the IRS Form 5471 penalty statute’s “history, purpose, and structure” all demonstrated that the IRS could assess the penalty through administrative means.

Given the Safdieh decision, the IRS may administratively assess and collect IRS Form 5471 penalties against taxpayers residing in or subject to appeal in the D.C. Circuit or the Second Circuit. Other courts of appeal are currently analyzing this issue, and it is likely the Tax Court may again revisit its Farhy decision after Safdieh.

The Takeaway

Taxpayers outside the D.C. Circuit and the Second Circuit should continue to raise Farhy defenses to IRS Form 5471 penalties (and other international penalties that may be viewed as not assessable penalties). However, given the IRS’s success in both the D.C. Circuit and the Second Circuit, taxpayers should not expect significant concessions from the IRS under this defense, either during examination or appeals. Accordingly, taxpayers should continue to raise other applicable defenses to a proposed late-filing penalty including traditional reasonable cause defenses. Taxpayers who pay the penalties—voluntarily or through offsets—should also try to raise all applicable defenses to avoid potential variance challenges by the government later in the process.

A copy of the Safdieh decision can be found here.

For questions concerning this blog post or any other civil or criminal matter, please contact me at mroberts@meadowscollier.com.