Raju J. Mukhi created three foreign entities between 2001 and 2005, through which he opened several foreign brokerage accounts. From 2005 to 2008, Mukhi transferred and withdrew millions of dollars through these entities.
Raju Mukhi pled guilty in 2014 to subscribing to false U.S. individual income tax returns and failing to file a foreign bank and financial accounts report (FBAR). Mukhi had created three foreign entities between 2001 and 2005, two trusts and a corporation. He failed, however, to timely file:
Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, for tax years 2005-2008;
Forms 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, for tax years 2005-2010; and
Forms 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, for tax years 2002-2013.
The IRS assessed a total of over $11 million in foreign reporting penalties, including over $10.9 million under Code Sec. 6677 for failure to file Forms 3520 and 3520-A, and $120,000 under Code Sec. 6038(b) for failure to timely file Forms 5471.
The Tax Court upheld the agency's authority to assess nearly $11 million in penalties against Mukhi for failing to report foreign trusts (Form 3520), it wouldn't allow the IRS to penalize him for failing to submit an information form revealing his ownership of Sukhmani Partners II Ltd., one of three foreign corporations Mukhi had created (Form 5471).
IRS Lacks Authority to Assess Section 6038(b) Penalties: The court reaffirmed its previous decision in Farhy v. Commissioner, holding that the IRS does not have the authority to assess penalties under Section 6038(b) of the Internal Revenue Code. The Tax Court made this decision in light of the fact that the U.S. Circuit Court of Appeals for the District of Columbia reversed the Tax Court's decision in Farhy.
The circuit court held that the IRS does, in fact, have statutory authority to assess penalties for failure to report control of foreign businesses under Code Sec. 6038(b). According to the D.C. Circuit, the "text, structure, and function" of Code Sec. 6038 show that Congress intended for the penalty to be assessable. After the D.C. Circuit's decision in Farhy, the IRS filed a motion for reconsideration in Mukhi.
In its second look at the IRS' authority to assess Code Sec. 6038(b) penalties in Mukhi, the Tax Court noted that the parties had stipulated the case is appealable to the 8th U.S. Circuit Court of Appeals. Therefore, said the Tax Court, the D.C. Circuit's decision in Farhy is not bi
Despite the ruling on Section 6038(b) penalties, the court upheld the majority of the challenged penalties,
which totaled approximately $11 million.
The court addressed various aspects of the collection due process, including the IRS's consideration of Mukhi's offers in compromise and the determination of his reasonable collection potential.
IRS Motion for Reconsideration: On June 7, 2024, the IRS filed a motion for reconsideration, asking the Tax Court to reconsider its holding regarding the Section 6038(b) penalties. The IRS cited the D.C. Circuit's May 3, 2024 decision in Farhy v. Commissioner, which reversed the Tax Court's earlier ruling on this issue.
The Mukhi case is appealable to
the Eighth Circuit, while the Farhy case was decided by the D.C. Circuit. This
creates potential for a circuit split on the issue of IRS authority to assess
Section 6038(b) penalties.
Potential Supreme Court Review: If different circuit
courts reach conflicting decisions on this issue, it may eventually lead to a
review by the U.S. Supreme Court.
This case has significant implications for taxpayers with foreign reporting requirements and the IRS's ability to assess certain penalties. It highlights the ongoing legal debate surrounding the IRS's authority to assess penalties under Section 6038(b) and the potential for further litigation and appeals in this area.
5472, 8938, & 3520 Late Filing Penalties?
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