On February 27, 2026, the United States Court of Appeals for the Second Circuit issued a pivotal ruling for tax professionals regarding the Internal Revenue Service’s (IRS) authority to assess foreign reporting penalties. In Safdieh v. Commissioner (No. 25-501-cv), the court held that the Commissioner of Internal Revenue may collect penalties under Internal Revenue Code (I.R.C.) § 6038(b) via administrative assessment. This decision officially aligns the Second Circuit with the D.C. Circuit in affirming the IRS’s administrative collection powers for this specific international information reporting penalty.

Factual Background

The Commissioner of Internal Revenue assessed Joseph Safdieh $50,000 in penalties for allegedly failing to report his control of a foreign business entity during the tax years 2005 through 2009. These penalties were levied pursuant to I.R.C. § 6038(b), which dictates that a U.S. person who fails to furnish required information regarding a controlled foreign business entity "shall pay a penalty of $10,000 for each annual accounting period with respect to which such failure exists". When Safdieh did not pay the assessed penalties, the Commissioner proceeded to file a notice of a federal tax lien against him.

Taxpayer’s Request for Relief and Tax Court Decision

In response to the federal tax lien, Safdieh sought relief by challenging the collection action in a Collection Due Process hearing before the Independent Office of Appeals. After losing his administrative appeal, Safdieh formally petitioned the United States Tax Court for relief.

In a December 5, 2024 order, the Tax Court, presided over by Judge Mark V. Holmes, sided with Safdieh and granted him summary judgment. The Tax Court’s rationale was "purely legal," holding that Congress had not statutorily authorized the Commissioner to collect the § 6038(b) penalty through the administrative assessment process. The Tax Court ruled that assessment is the critical mechanism that "records a taxpayer’s liability and triggers the Internal Revenue Service’s collection powers". Consequently, the Tax Court concluded that if the Commissioner wished to penalize Safdieh’s reporting failures, "he had to go to federal district court".

Second Circuit’s Analysis of the Law

The Commissioner appealed the Tax Court’s decision to the Second Circuit, presenting the core question of whether the IRS "can collect penalties under Internal Revenue Code (‘I.R.C.’) § 6038(b) through administrative assessment, or instead must obtain a judgment in federal district court".

The appellate court first analyzed the vital role of assessment, pointing out that "it is the assessment, and only the assessment, that sets in motion the collection powers of the IRS," citing Phila. & Reading Corp. v. United States, 944 F.2d 1063, 1064 n.1 (3d Cir. 1991). Such powers empower the IRS to seize assets, freeze bank accounts, and create liens without stepping foot in a courtroom—tools deemed necessary because "‘taxes are the life-blood of government, and their prompt and certain availability an imperious need,’" as established in United States v. Forma, 42 F.3d 759, 766 (2d Cir. 1994).

While I.R.C. § 6201(a) grants the Commissioner authority to assess "all taxes" as well as "assessable penalties," the court observed that § 6038(b)’s text is completely "silent as to whether the penalty is assessable". Because the statutory texts were ambiguous and the parties’ arguments struggled to "make sense out of silence," the Second Circuit focused its legal analysis on § 6038(b)’s "history, purpose, and structure".

Application of the Law to the Facts

First, the court extensively examined the history and purpose of § 6038(b), which Congress enacted in 1982 to supplement an existing penalty that reduced a violator’s foreign tax credit. The court noted that the older penalty under § 6038(c) was "assessable," but Congress found it "complicated," "unduly harsh" for minor failures, and completely ineffective for taxpayers who paid no foreign taxes. To address this under-enforcement, Congress added the fixed dollar penalty to "simplify the penalty for failure to furnish information" and give agents a "simple straight-forward penalty to impose".

The court concluded it was highly "implausible" that Congress would require a time-consuming detour to federal district court, reasoning that "[i]t is unlikely that Congress would have wished to put even more logs in the way of the tax harvester when its stated aim was to clear the road". Furthermore, the Second Circuit placed great weight on the IRS’s original and consistent interpretation, noting that the agency "has assessed the penalty ever since its enactment in 1982" and that Congress has acquiesced by amending the section seven times without altering the assessment practice. Relying on the doctrine of legislative acquiescence outlined in Costanzo v. Tillinghast, 287 U.S. 341, 345 (1932), the court affirmed that the "failure of Congress to alter or amend [a statute], notwithstanding this consistent construction by the department charged with its enforcement, creates a presumption in favor of the administrative interpretation".

Second, the court analyzed the statutory structure, specifically focusing on the coordination clause found in § 6038(c)(3), which reduces the foreign tax credit penalty by "the amount of the penalty imposed by subsection (b)". The court deduced that "Congress meant for the Commissioner to be able to impose the subsection (b) and (c) penalties at the same time," which would be impossible if the IRS had to await a district court judgment for the subsection (b) penalty. Quoting the D.C. Circuit’s prior analysis of this exact issue in Farhy v. Comm’r, 100 F.4th 223 (D.C. Cir. 2024), the court declared, "To agree with that reading, we would have to conclude that, in enacting subsection (b), Congress not only failed in its avowed quest to streamline, but also counterproductively threw sand in the gears of section 6038’s existing enforcement scheme". The court emphasized that bifurcating the proceedings between the Tax Court and federal district court would result in a wasteful "duplication of effort" and raise complex issues of issue preclusion. Referencing Comm’r v. Sunnen, 333 U.S. 591, 601 (1948), the court warned that taxpayers might engage in "gamesmanship" by rushing to judgment in the preferred court to secure a binding factual determination.

Finally, the court rejected Safdieh’s argument that 28 U.S.C. § 2461(a) serves as the Commissioner’s "only" collection authority for this penalty. The court found this unpersuasive because § 2461(a) is codified in Title 28—which concerns the judiciary, not the I.R.C.—and was never utilized to collect a tax penalty between its 1948 enactment and the creation of the dollar penalty in 1982.

Conclusion

Ultimately, the Second Circuit firmly aligned itself with the D.C. Circuit, noting it is "the only other court of appeals to have decided the issue". Finding that § 6038(b)’s "history, purpose, and structure all point in the same direction," the court decisively concluded that "the penalty is assessable". As a result, the court formally held that "the Commissioner may assess penalties under § 6038(b)" and vacated the Tax Court’s order granting summary judgment to Safdieh, remanding the case for further proceedings.

Prepared with assistance from NotebookLM.