Appeals Court Urged to Affirm Ruling Limiting IRS Penalty Power

The IRS lacks authority to assess a penalty for failing to report ownership interest in foreign corporations because the tax code doesn’t permit it, a taxpayer told an appeals court Thursday.

The failure-to-report penalty under IRC Section 6038 may only be recovered through a civil action, not through the IRS’s assessment authority, because Congress never specified the mode of recovery or enforcement, the taxpayer’s brief said. The IRS appealed to the US Court of Appeals for the D.C. Circuit after losing in US Tax Court, where it argued in favor of its authority to assess.

The agency’s defeat last ...