Form 5471 and 5472 Penalties: The Abatement Paths After Farhy and Mukhi, and Why the IRS Still Assesses

Short version: Form 5471 Explained: U.S. Owners of Foreign Corporations · Form 5472 Explained: Foreign-Owned U.S. Companies and LLCs

A missed Form 5471 (for a US person's Canadian corporation) draws a $10,000 penalty per form per year, assessed automatically on late filing, with $10,000 continuation penalties per 30 days after IRS notice up to $50,000. A missed Form 5472 (for a Canadian-owned US corporation or LLC) draws $25,000 per year. For years these penalties were assessed and collected like tax. In 2023 the Tax Court held in Farhy v. Commissioner that section 6038(b) (the Form 5471 penalty) contains no assessment authority, so the IRS cannot assess or collect it administratively; the government must sue. The D.C. Circuit reversed in 2024, and in 2026 the Second Circuit, in Safdieh v. Commissioner, agreed that the penalties are assessable. The Tax Court, in Mukhi (2024), reaffirmed Farhy for taxpayers whose appeals lie outside those circuits, while holding that the Form 3520 and Form 8938 penalties (under different sections) are assessable. The IRS has continued to assess Form 5471 penalties nationwide; the two circuits to rule have both sided with the IRS, the Tax Court still holds otherwise for taxpayers elsewhere, and the Supreme Court has not ruled. For a taxpayer with a notice, the Farhy argument is one path among several, and reasonable cause is still the first.

Key takeaways

• The penalties: Form 5471, $10,000 per form per year under section 6038(b), plus $10,000 per 30 days after notice up to $50,000, plus a 10% reduction in foreign tax credits; Form 5472, $25,000 per year under section 6038A, plus $25,000 per 30 days after notice, with no maximum; both assessed automatically on late filing.
• Farhy (Tax Court, 2023): section 6038(b) penalties are not "assessable penalties" because the statute does not provide for assessment; the IRS must bring a civil action to collect them. Reversed by the D.C. Circuit (2024), and by the Second Circuit in Safdieh (2026), both reading the penalty as assessable.
• Mukhi (Tax Court, 2024): the Tax Court, bound by the D.C. Circuit only for cases appealable there, reaffirmed Farhy for other taxpayers under the Golsen rule; it held that section 6039F (Form 3520 gift penalties) and section 6038D (Form 8938) penalties are assessable.
• Current practice: the IRS assesses Form 5471 and 5472 penalties as before; a taxpayer whose appeal lies outside the D.C. and Second Circuits can still contest the assessment's validity in a collection due process hearing and in Tax Court (which follows Farhy under the Golsen rule); the two circuits to rule (D.C. in 2024, the Second in Safdieh in 2026) have both upheld assessment, and the Supreme Court has not ruled.
• Abatement paths, in order: reasonable cause (the statutory exception; a written statement); first-time abatement (not available for these penalties by IRS policy, but sometimes granted informally); the Farhy argument (in a CDP hearing or Tax Court, outside the D.C. Circuit); DIIRSP (filing late with reasonable cause where income was reported); streamlined (which waives the penalties for the covered years).
• A Canadian taxpayer's circuit: a taxpayer with no US residence appeals to the D.C. Circuit; Farhy is therefore reversed for most Canadians abroad, and the argument is weaker for them than for a US resident in another circuit.

The penalties

Section 6038(b) imposes $10,000 for each annual accounting period for which a Form 5471 is not filed by a person required to file (Category 4 and 5 filers: controlling shareholders and CFC shareholders), with an additional $10,000 for each 30-day period after the IRS mails notice, up to $50,000 per return, and a reduction in the foreign tax credit. Section 6038A imposes $25,000 for each year a 25% foreign-owned US corporation (including a foreign-owned disregarded LLC) fails to file Form 5472, with $25,000 continuation penalties and no cap. The IRS's systems assess both on late filing without human review.

Farhy

Farhy, a US resident, failed to file Forms 5471 for foreign corporations for eight years; the IRS assessed the penalties and pursued collection; in a collection due process case, Farhy argued that section 6038(b) does not authorize assessment. The Tax Court agreed: the Code provides assessment authority for taxes and for "assessable penalties" that the Code designates as such, and section 6038(b) neither provides for assessment nor is designated assessable, unlike other penalty sections; the government's remedy is a civil action under 28 U.S.C. § 2461. The IRS appealed to the D.C. Circuit (Farhy's appeal lay there because he was a US resident of Washington or because the case involved a collection matter; the court's jurisdiction was proper), which reversed in May 2024, reading the statute's structure and history as supporting assessability.

Mukhi

Mukhi, in a case involving Forms 5471, 3520, and 8938, argued Farhy after the D.C. Circuit's reversal. The Tax Court applied the Golsen rule (it follows the law of the circuit to which a case is appealable): for Mukhi, appealable elsewhere, it reaffirmed its Farhy holding that section 6038(b) penalties are not assessable. It held that the Form 3520 penalty under section 6039F and the Form 8938 penalty under section 6038D are assessable (those sections are structured differently). The result is a circuit-dependent rule: in the D.C. Circuit, Form 5471 penalties are assessable; elsewhere, the Tax Court says they are not, pending other circuits' decisions.

Who appeals where

A Tax Court decision is appealable to the circuit where the taxpayer's legal residence is when the petition is filed; a taxpayer with no US residence appeals to the D.C. Circuit. A US citizen living in Canada with a Canadian corporation therefore appeals to the D.C. Circuit, where Farhy was reversed; the Farhy argument does not help them in Tax Court. A Canadian-born US resident of Texas or California with a Canadian corporation appeals to the Fifth or Ninth Circuit, where the question is open and the Tax Court follows Farhy.

Abatement paths

Reasonable cause. Sections 6038(b) and 6038A both provide that no penalty applies if the failure is due to reasonable cause. A written statement: reliance on a preparer who was given the corporation's information and did not know the form existed; the taxpayer's unawareness despite ordinary care; prompt filing on discovery. Submitted with the late form, or in response to the penalty notice. The IRS grants reasonable-cause abatement on Form 5471 penalties regularly where the statement is specific.

First-time abatement. The IRS's first-time abatement policy applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties, not to international information return penalties; some examiners grant it informally, but it is not an entitlement for Form 5471.

The Farhy argument. Raised in a collection due process hearing (when the IRS issues a notice of intent to levy or a lien) and then in Tax Court, by a taxpayer whose appeal lies outside the D.C. Circuit. Its value is uncertain and depends on appellate developments; it is a lever in negotiation.

DIIRSP. A late Form 5471 filed with a reasonable-cause statement where the corporation's income was reported (no Subpart F or GILTI omission); the penalty may be assessed and then abated on the statement.

Streamlined. A late Form 5471 in a streamlined submission for the covered years draws no penalty; this is the cleanest path for a taxpayer with unreported foreign income who qualifies.

What to do with a notice

Respond within the notice period with the reasonable-cause statement and a request for abatement; if denied, request Appeals consideration; if collection begins, request a CDP hearing and raise reasonable cause and (outside the D.C. Circuit) Farhy; petition the Tax Court from an adverse CDP determination. Pay nothing until the reasonable-cause request is decided, unless collection pressure requires it.

Worked example

A Canadian who moved to Houston in 2021, keeping a 100%-owned Ontario holding company, filed 1040s each year without Form 5471. In 2026 she files the missing forms with reasonable-cause statements (her US preparer did not know the form; the corporation's income was Subpart F and was, in fact, not reported, so she uses the streamlined domestic track instead).

• If she had used DIIRSP (income reported): four Forms 5471 filed with statements; the IRS's system assesses $40,000; she responds with the statements; abatement likely on the facts (a preparer who missed it; prompt filing).
• If abatement is denied: Appeals; then a CDP hearing on collection; as a Texas resident, her appeal lies in the Fifth Circuit, and the Tax Court would follow Farhy on the assessability question; a lever.
• What she does: SDOP (she filed returns for the three years; she lives in the US): amended returns with the Subpart F inclusions and the Forms 5471; the 5% penalty on the corporation's unreported value; no Form 5471 penalties for the covered years. Then she winds up the corporation.

Official sources

In Farhy v. Commissioner, 160 T.C. No. 6 (2023), the Tax Court held that the IRS lacks statutory authority to assess penalties under section 6038(b) for failure to file Form 5471. The D.C. Circuit reversed in 2024, holding the penalties "are assessable," and the Second Circuit agreed in Safdieh v. Commissioner (Feb. 2026); the Tax Court, in Mukhi v. Commissioner (2024), reaffirmed Farhy for taxpayers whose appeals lie outside those circuits. — United States Tax Court, Farhy v. Commissioner (D.C. Cir. 2024), No. 23-1179, https://caselaw.findlaw.com/court/us-dc-circuit/116134192.html

Form 5471 is required of certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations, including controlled foreign corporations. — Internal Revenue Service, About Form 5471, https://www.irs.gov/forms-pubs/about-form-5471

The IRS states that taxpayers "may attach a reasonable cause statement to each delinquent information return filed for which reasonable cause is being asserted," that such returns "will not be automatically subject to audit but may be selected for audit through the existing audit selection processes," and that "penalties may be assessed in accordance with existing procedures." — Internal Revenue Service, Delinquent International Information Return Submission Procedures, https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures

Practitioner note

Farhy is a real argument for a US resident in most circuits and almost no help for a US citizen in Canada, whose appeal goes to the one court that reversed it. Reasonable cause is still the first path and it still works for a preparer's omission. For a taxpayer who qualifies, the streamlined program is the path that makes the question moot, and it is the one we take.

See also: For the full picture of what each agency charges, see late-filing penalties on both sides of the border, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the Form 5471 or 5472 late filings with reasonable-cause statements, the response to a penalty notice through Appeals and CDP, and the streamlined submission where it applies. See cross-border pricing or book a call.