Second Circuit Rejects Tax Court’s Farhy Holding on § 6038 (b) Penalty Authority

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Published on

March 5, 2026
Second Circuit Rejects Tax Court’s Farhy Holding on § 6038 (b) Penalty Authority

Safdieh v. Commissioner, ___ F.4th ___ (2d Cir. Feb. 27, 2026)

Background

In Farhy v. Commissioner, 160 T.C. 399 (2023), the United States Tax Court held that the Internal Revenue Service lacked statutory authority to assess and administratively collect penalties imposed under Internal Revenue Code § 6038(b) for failure to file Form 5471 and related international information returns. The Tax Court reasoned that because Section 6038(b) does not expressly provide assessment authority, and because Section 6201(a) authorizes assessment only of taxes and certain assessable penalties, the IRS was required to pursue collection through a civil action in district court.

The D.C. Circuit reversed that holding in Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 2024), concluding that Section 6038(b) Form 5471 penalties are assessable under Section 6201(a) and that the IRS may employ its ordinary administrative collection tools, including liens and levies.

The Tax Court’s Golsen Approach

Following the D.C. Circuit’s reversal, the Tax Court adhered to its original Farhy analysis in cases appealable to circuits other than the D.C. Circuit under the Golsen rule. In doing so, the court maintained that its statutory interpretation was correct absent controlling appellate precedent to the contrary.

Second Circuit Decision in Safdieh

On February 27, 2026, the Second Circuit issued its opinion in Safdieh v. Commissioner, aligning itself with the D.C. Circuit. The court held that § 6038(b) penalties are assessable under Section 6201(a) and may be administratively collected by the IRS.

The Second Circuit rejected the Tax Court’s view that explicit assessment language was required. Instead, the court interpreted the statutory structure and enforcement framework of the Code as evidencing congressional intent that fixed-dollar information reporting penalties under Section 6038(b) be assessable and collectible through standard IRS procedures.

Implications

With the Second Circuit joining the D.C. Circuit, appellate authority now supports the IRS’s position that Section 6038(b) penalties are assessable and subject to administrative collection. Taxpayers within those circuits can expect courts to uphold IRS assessments of Form 5471 penalties. Unless another circuit adopts the Tax Court’s reasoning, the likelihood of further review may diminish.

The decision reinforces the importance of strict compliance with international information reporting obligations, given the IRS’s confirmed ability to assess and collect these penalties administratively.

Author

Anthony N. Verni

ATTORNEY AT LAW, J.D., CPA, MBA
With 20+ years of experience practicing before the IRS, I bring a rare combination of legal and financial expertise as both an Attorney and a Certified Public Accountant.
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