International Informational Reporting Penalties, Forms 5471, 3520, 8858

By Zaher Fallahi, Tax Controversy Defense Attorney

International informational reporting penalties are among the most aggressively enforced civil penalties in the Internal Revenue Code.

Forms such as:

• Form 5471 (Foreign Corporations)
• Form 3520 / 3520-A (Foreign Trusts & Gifts)
• Form 8858 (Foreign Disregarded Entities)
• Form 8865 (Foreign Partnerships)

can carry automatic penalties beginning at $10,000 per form per year, with continuation penalties that escalate quickly.

Recent Appellate Decisions Strengthen IRS Enforcement

In 2023, the U.S. Tax Court initially held that the IRS lacked statutory authority to assess Form 5471 penalties under Section 6038(b).  However, appellate courts later reversed that position.

In February 2026, the U.S. Court of Appeals for the Second Circuit confirmed; Safdieh v. Comm’r, No. 25-501-cv (2d Cir. Feb. 27, 2026), that:

The IRS may assess and administratively collect Section 6038(b) penalties.

This means the IRS does not need to file a lawsuit in federal district court before collecting these penalties. But assessment authority does not mean every penalty is valid.

How International Penalties Can Still Be Challenged

Even after these appellate decisions, penalties may be invalid if:

• The form was not legally required
• Filing thresholds were misunderstood
• The IRS misapplied the statute
• Reasonable cause exists
• Supervisory approval was missing
• The IRS failed procedural requirements
• The penalty was imposed mechanically

International informational reporting is highly technical. A careful statutory analysis often changes the outcome. For related issues, you may also review:

• FBAR Penalty Defense
• OFAC & International Sanctions Compliance
• International Tax Controversy Representation

A Real Example From My Practice

I recently represented a client assessed a substantial international informational penalty. The case lasted nearly four years, crossed the COVID period, and was transferred between IRS offices.

The core issue was simple:

• The wrong form had been filed.
• The form was not legally required.
• The IRS processed it incorrectly.
• The penalty was imposed mechanically.

From the beginning, I told her:

“If this ends up in court, you will win.”

Last week, she received notice that the penalty was waived.

As I always tell my clients:

“You won. I simply presented the argument.”

Experience in Offshore & International Matters

During the 2010–2014 Offshore Voluntary Disclosure Program (OVDP), my office handled numerous offshore matters, including cases involving IRS Criminal Investigation. On more than one occasion, Criminal Investigation officers commented:

“Mr. Fallahi, the packages you send in are so well organized.”

International reporting failures are frequently the result of misunderstanding, immigration transitions, cross-border family structures, or incorrect professional advice, not criminal intent.

Sometimes the defense is straightforward:

“Your Honor, my clients are innocent; they simply forgot to report.”

If You Have Received an International Penalty Notice

Do not assume it is final.
Do not respond without strategic review.

International informational penalties are serious, but they are defendable.

Zaher Fallahi
Tax Controversy Defense Attorney
Attorney at Law & Certified Public Accountant (CPA)