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Published:   |   Last Updated: February 9, 2024

Chapter 61 Foreign Information Penalties: Part Two: Taxpayers and Tax Administration Need Finality, Which Requires Legislation

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Due process requires that matters be resolved according to established rules and principles and that taxpayers be treated fairly. The international information return (IIR) penalty regime under IRC Chapter 61, Subchapter A, Part III, Subpart A does not adhere to this fundamental mandate. Now is the time for Congress to fix this broken system by providing a clear path for implementation of these penalties. This fix, which would provide much-needed clarity and finality, will require legislation.

The need for this legislation has been brought to a head by the U.S. Tax Court’s recent decision in Farhy v. Commissioner, which holds that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b). In part one of this series, I provide a discussion of this decision and a recommendation that would protect the rights of both taxpayers and the government.

Since assuming the role of National Taxpayer Advocate, I have recommended that the IRS cease systemic assessment of these penalties, and I have requested that Congress enact legislation providing the IRS the ability to utilize deficiency procedures for IIR penalties. Among other things, deficiency procedures allow for judicial review in the Tax Court prior to the assessment and payment of the asserted penalties.

Compared to other courts, the Tax Court is more accessible for taxpayers and is by far the least expensive and easiest to navigate for low-income taxpayers. Amending the IRC to implement deficiency procedures would solve the problem highlighted by the Tax Court in Farhy. Nevertheless, there remains a separate and important issue regarding Chapter 61 IIR penalties that also needs a legislative fix.

Chapter 61 International Information Return Penalties Require Finality

Taxpayers are entitled to finality and a fair and just tax system. Protection of these rights is a bedrock aspect of quality tax administration.

The failure to provide a clear statute of limitations for some Chapter 61 penalties represents a defect in the IRC. Unlike most other penalty provisions in the code, there is no explicit statute of limitations impacting some Chapter 61 penalties. Nothing in the code specifically prohibits the IRS from imposing penalties going all the way back to the enactment of some code sections. That being said, the Court noted in Farhy, “28 U.S.C. § 2461(a) expressly provides that ‘[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for violation of an Act of Congress without specifying the mode of recovery or enforcement thereof, it may be recovered in a civil act.’”  28 U.S.C. § 2462 provides that a suit to enforce penalties must be commenced within five years.

The IRS currently follows a policy that applies the period of limitations under IRC § 6501 – specifically as articulated in IRC § 6501(c)(8) – to certain Chapter 61 penalties. This means that the applicable statute of limitations generally runs for three years after the date on which accurate and complete information returns are filed. The IRS articulates this policy in the Internal Revenue Manual. It has also been adopted in at least one Federal District Court case (see Colliot v. United States, 2021 WL 2709676). The IRS’s established policy is in accord with my recommendation to codify the IIR period of limitations consistent with IRC § 6501.

The analysis linking the IRC § 6501 period of limitations to Chapter 61 IIR penalties is related to the IRS’s argument that the underlying penalties are immediately assessable upon notice and demand in the same manner as tax. This latter contention, however, was rejected by the Tax Court in Farhy. The logical consequence of this decision is that non-assessable IIR penalties are  likewise not subject to the IRC § 6501 period of limitations.

In the interest of quality tax administration, I strongly recommend that Congress amend the procedures for Chapter 61, Subchapter A, Part III, Subpart A penalties to remedy two problems. First, as I recommended in my prior blog, Congress should make IIR penalties subject to deficiency procedures, which would address the issue decided in Farhy. Second, consistent with IRS policy, Congress should ensure that IRC § 6501 explicitly covers the period of limitation for assessment of Chapter 61 IIR penalties.

Currently, the plain language of IRC § 6501(c)(8) specifically mentions “taxes” but does not mention penalties. The IRS merely infers that Chapter 61 IIR penalties fall within its scope. The second fix I am proposing would ensure that the penalties and the related taxes would also be subject to the period of limitations set forth in IRC § 6501. Since the IRS already has adopted this policy in practice, it should support such a legislative clarification. This step would provide taxpayers with finality.


Finality, or the lack of it, can have a direct impact on tax compliance. Taxpayers are entitled to know the specific terms of the period of limitations for Chapter 61 IIR penalties. The period of limitations must provide clarity and finality to all while helping ensure quality tax administration. My recommendations, which would achieve these goals, would not provide these penalties with any special or unusual protections. They would simply guarantee that these penalties are subject to an explicitly articulated period of limitations, along with well-established deficiency procedures, as is the case for other penalties falling within IRC § 6501. The legislative clarification that I am suggesting for the period of limitations would codify existing IRS policy and defend taxpayer rights.


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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

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