Penalty Assessability after Mukhi

Over the past several years, the Supreme Court has handed down landmark rulings that have reshaped the contours of federal administrative authority. The court's 6-3 conservative majority, solidified during Donald J. Trump's first presidency, continues to exert influence well into his second term and beyond.

In the realm of tax administration and the Internal Revenue Service, these shifts have redirected power away from the agency's interpretive discretion and toward judicial forums, notably the United States Tax Court. The court's decision in Loper Bright Enterprises v. Raimondo last year overturned the long-standing Chevron doctrine, ending decades of deference to agency interpretations of ambiguous statutes. This change has funneled fresh challenges to IRS regulations into the Tax Court, fostering new lines of judicial precedent in tax law.

One illustrative case is Mukhi v. Commissioner. There, the Tax Court confronted the question of whether penalties imposed for failing to report interests in controlled foreign corporations under Section 6038 could be assessed by the IRS through the same administrative process used for underlying tax liabilities—or whether such penalties could be recovered only through a civil action against the taxpayer.

The IRS possesses broad authority to assess taxes unilaterally, without prior court approval: Once it determines an amount is owed, the taxpayer becomes liable, and collection may proceed administratively. The core issue in Mukhi was whether this assessment power extends automatically to penalties or requires explicit statutory authorization.

After examining the relevant provisions, their legislative history, and congressional intent through detailed statutory analysis, the Tax Court concluded that penalties are not inherently assessable in the same manner as taxes. Unless the statute establishing a particular penalty expressly designates it as assessable—treating it, in effect, as equivalent to a tax—the IRS lacks authority to assess it administratively. In such cases, Congress must make its intention clear; absent that, the penalty may be enforced only by suing the taxpayer in federal court.