In Safdieh v. Commissioner, No. 25-501-cv (February 27, 2026), the Court of Appeals for the Second Circuit reversed the Tax Court and held that the Internal Revenue Service (IRS) may collect section 6038(b) penalties through administrative assessment. In doing so, the Second Circuit joined the DC Circuit, which addressed the same legal issue in Farhy v. Commissioner, in affirming the IRS's ability to collect such penalties. Safdieh highlights the importance for taxpayers that reside in jurisdictions within the Second and DC Circuits of maintaining compliance with international information reporting obligations. Taxpayers that reside in other jurisdictions, however, should continue to consider their potential legal rights and remedies.

Under section 6038(a), U.S. persons who control any foreign business entity must "furnish… such information as the Secretary may prescribe" by filing the requisite international information return (e.g., Form 5471 for corporations, Form 8865 for partnerships). Failure to do so can result in a penalty of $10,000 for each year in which the taxpayer fails to file the required form, in addition to possible continuation penalties, under section 6038(b). In Safdieh, the IRS assessed $50,000 of section 6038(b) penalties against the taxpayer for five years of alleged failures to make section 6038(a) filings with respect to a foreign entity he controlled.

The Tax Court granted the taxpayer summary judgment, holding, as it did in Farhy, that the IRS lacked the statutory authority to collect section 6038(b) penalties. Because the Tax Court concluded that the IRS lacks assessment authority, it held that the government must instead collect such penalties by filing suit in federal district court. 

On appeal, the Second Circuit found the text of sections 6038 and 6201(a), which provides the IRS with its general assessment authority, were silent on the IRS's authority to assess section 6308(b) penalties. The court looked instead to the "history, purpose, and structure" of section 6038 and, based on its review, rejected the taxpayer's (and the Tax Court's) reading of section 6038 and vacated the Tax Court's grant of summary judgment.

The court held that IRS authority to assess section 6038(b) penalties is consistent with section 6038(b)'s history and purpose. From its review of the legislative history, the court found a congressional intent that the IRS can easily impose and collect these penalties. The court held that an interpretation of section 6038(b) that requires the IRS to take each section 6038(b) case to federal district court is inconsistent with this congressional intent. The court also found it significant that Congress has never questioned the IRS's historic practice of assessing penalties under section 6038(b) over the 43 years since its enactment.

The court also held that the taxpayer's interpretation of section 6038 "would badly disrupt the section's overall enforcement scheme, defeating Congress's design." Section 6038(c) imposes a companion penalty, a 10 percent reduction of a taxpayer's foreign tax credit (FTC) under section 901, for violations of section 6038(a), which is meant to work in coordination with the section 6038(b) penalty. The court held that the taxpayer's interpretation of section 6038(b) would disrupt that coordination scheme, delaying the imposition of any penalty until a federal district court determined whether collection of a section 6038(b) penalty was appropriate. The court also noted that, under the taxpayer's theory, the imposition of section 6038(b) penalties could result in parallel proceedings in federal district court on the section 6038(b) penalty and in Tax Court on the section 6038(c)(1) reduction, which would raise issues of judicial economy and issue preclusion and would "complicat[e] the penalization of tax-reporting failures and promot[e] gamesmanship."

We expect continued litigation on this issue as taxpayers challenge the assessment of section 6038(b) penalties and other similar penalties. Multiple cases presenting this issue have been decided by lower courts and are awaiting a potential appeal by the IRS. One such case, Mukhi II, is a case in the Tax Court appealable to the Eighth Circuit (our prior coverage of Mukhi II is here); another is Zhang v. IRS, a case in the Northern District of California appealable to the Ninth Circuit. As the IRS appeals these cases, we are watching for, on the one hand, the prospect of a circuit split and potential review by the Supreme Court and, on the other hand, the potential that the Tax Court reconsiders its view in light of the circuit courts' decisions.

For more information, please contact:

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

Tyler C. Jackson, tjackson@milchev.com, 202-626-5820

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