Contents
When do You Have Reasonable Cause for Failing to File FBAR?
Reasonable Cause for Failing to File FBAR
Reasonable Cause & Late FBAR: When it comes to international information reporting to the Internal Revenue Service, the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114) is probably the most common and well-known form — partly due to the (relatively) lower threshold for reporting — and partly due to the penalties the IRS issues for noncompliance. The FBAR is not even a Tax Form (Under Title 26); rather, it is a Money and Finance Form under Title 31, which was introduced to curtail Money-Laundering under the AML regime. Oftentimes, the biggest headache involving the FBAR for Taxpayers is not so much the filing of the form as it is what to do about late or delinquent filing. Since the FBAR is not a Tax Return Form, penalty disputes with the IRS are not litigated in Tax Court. If the Taxpayer loses any appeal at the IRS, the matter then goes to Federal Court — although the Flora “Full Payment” Rule may not be applicable based on a recent Court Case. In order to avoid, minimize or abate (remove) FBAR Penalties, the Taxpayer must show Reasonable Cause. Since there is no bright-line test to establish Reasonable Cause for FBAR non-compliance — it is essentially based on the Taxpayer using the facts to establish that under a “totality of the Circumstance” analysis, foreign account penalties should not be assessed — or if already assessed then they should be removed. Let’s review the basics of Reasonable Cause for late or delinquent FBAR and how to qualify for Tax Amnesty, such as Voluntary Disclosure Program, Streamlined Procedures, or Delinquency Procedures.
Reasonable Cause for FBAR
The concept of Reasonable Cause and Not Willful Neglect involves the idea that a U.S. Person who is in violation of the FBAR should not be required to pay penalties for their non-compliance. Therefore, if the account holder can prove to the Internal Revenue Service that they have reasonable cause, then the IRS may avoid, mitigate or abate (eliminate) penalties. Taxpayers have an opportunity to show reasonable cause through a well-written and highly persuasive reasonable cause statement — usually through a Board-Certified Tax Law Specialist. There are several factors to be aware of, including the type of accounts, number of accounts, total unreported income and account values, country of origin, and its relation to the account holder — along with many other considerations.
26 CFR 301.6724-1 FBAR Reasonable Cause
-
(a) Waiver of the penalty –
-
(1) General rule.
-
The penalty for a failure relating to an information reporting requirement (as defined in paragraph (j) of this section) is waived if the failure is due to reasonable cause and is not due to willful neglect.
-
-
(2) Reasonable cause defined.
-
The penalty is waived for reasonable cause only if the filer establishes that either –
-
(i) There are significant mitigating factors with respect to the failure, as described in paragraph (b) of this section; or
-
(ii) The failure arose from events beyond the filer’s control (“impediment”), as described in paragraph (c) of this section. Moreover, the filer must establish that the filer acted in a responsible manner, as described in paragraph (d) of this section, both before and after the failure occurred. Thus, if the filer establishes that there are significant mitigating factors for a failure but is unable to establish that the filer acted in a responsible manner, the mitigating factors will not be sufficient to obtain a waiver of the penalty. Similarly, if the filer establishes that a failure arose from an impediment but is unable to establish that the filer acted in a responsible manner, the impediment will not be sufficient to obtain a waiver of the penalty. See paragraph (g) of this section for the reasonable cause safe harbor for persons who exercise due diligence.
-
-
-
(b) Significant mitigating factors.
-
In order to establish reasonable cause under this paragraph (b), the filer must satisfy paragraph (d) of this section and must show that there are significant mitigating factors for the failure. The mitigating factors include, but are not limited to –
-
(1) The fact that prior to the failure the filer was never required to file the particular type of return or furnish the particular type of statement with respect to which the failure occurred, or
-
(2) The fact that the filer has an established history of complying with the information reporting requirement with respect to which the failure occurred. In determining whether the filer has such an established history, significant consideration is given to –
-
(i) Whether the filer has incurred any penalty under §§ 301.6721-1, 301.6722-1, or 301.6723-1 in prior years for the failure (or under parallel provisions of prior law), and
-
(ii) If the filer has incurred any such penalty in prior years, the extent of the filer’s success in lessening its error rate from year to year. A filer may treat as a penalty not incurred any penalty under sections 6721 through 6723 that was self-assessed under section 6724(c)(3) and any penalty under section 6676(b) that was self-assessed under section 6676(d), prior to amendment or repeal by the Omnibus Budget Reconciliation Act of 1989. See paragraph (c)(5) of this section for the application of this paragraph (b) to failures attributable to the actions of a filer’s agent.
-
-
-
(c) Events beyond the filer’s control –
-
(1) In general.
-
In order to establish reasonable cause under this paragraph (c)(1), the filer must satisfy paragraph (d) of this section and must show that the failure was due to events beyond the filer’s control. Events which are generally considered beyond the filer’s control include but are not limited to –
-
(i) The unavailability of the relevant business records (as described in paragraph (c)(2) of this section),
-
(ii) An undue economic hardship relating to filing on magnetic media (as described in paragraph (c)(3) of this section),
-
(iii) Certain actions of the Internal Revenue Service (as described in paragraph (c)(4) of this section), (iv) Certain actions of an agent (as described in paragraph (c)(5) of this section), and (v) Certain actions of the payee or any other person providing necessary information with respect to the return or payee statement (as described in paragraph (c)(6) of this section).
-
-
-
(2) Unavailability of the relevant business records.
-
In order to establish reasonable cause under paragraph (c)(1) of this section due to the unavailability of the relevant business records, the filer’s business records must have been unavailable under such conditions, in such manner, and for such period as to prevent timely compliance (ordinarily at least a 2-week period prior to the due date (with regard to extensions) of the required return or the required date (with regard to extensions) for furnishing the payee statement), and the unavailability must have been caused by a supervening event. A “supervening event” includes, but is not limited to –
-
(i) A fire or other casualty that damages or impairs the filer’s relevant business records or the filer’s system for processing and filing such records;
-
(ii) A statutory or regulatory change that has a direct impact upon data processing and that is made so close to the time that the return or payee statement is required that, for all practical purposes, the change cannot be complied with; or
-
(iii) The unavoidable absence (e.g., due to death or serious illness) of the person with the sole responsibility for filing a return or furnishing a payee statement.
-
-
-
-
(3) Undue economic hardship relating to filing on magnetic media.
-
In order to establish reasonable cause under paragraph (c)(1) of this section due to an undue economic hardship for filing on magnetic media, the filer must show that it failed to file on magnetic media because the filer lacked the necessary hardware. For purposes of this paragraph (c)(3), the filer will not be considered to have acted in a responsible manner under paragraph (d) of this section unless –
-
(i) The filer attempted on a timely basis to contract out the magnetic media filing;
-
(ii) The cost of filing on magnetic media was prohibitive as determined at least 45 days before the due date of the returns (without regard to extensions) (90 days for information returns the due date for which (without regard to extensions) is after December 31, 1989, and by or before February 28, 1991 (March 15, 1991, for Forms 1042S));
-
(iii) The cost was supported by a minimum of two cost estimates from unrelated parties; and (iv) The filer filed the returns on paper. Reasonable cause will not ordinarily be established under this paragraph (c)(3) if a filer received a reasonable cause waiver in any prior year under paragraph (c)(1) of this section due to an undue economic hardship relating to filing on magnetic media.
-
-
-
(4) Actions of the Internal Revenue Service.
-
In order to establish reasonable cause under paragraph (c)(1) of this section due to certain actions of the Internal Revenue Service, a filer must show that the failure was due to the filer’s reasonable reliance on erroneous written information from the Internal Revenue Service. Reasonable reliance means that the filer relied in good faith on the information. The filer shall not be considered to have relied in good faith if the Internal Revenue Service was not aware of all the facts when it provided the information to the filer. In order to substantiate reasonable cause under this paragraph (c)(4), the filer must provide a copy of the written information provided by the Internal Revenue Service and, if applicable, the filer’s written request for the information.
-
-
(5) Actions of agent – imputed reasonable cause.
-
In order to establish reasonable cause under paragraph (c)(1) of this section due to actions of an agent, the filer must show the following:
-
(i) The filer exercised reasonable business judgment in contracting with the agent to file timely correct returns or furnish timely correct payee statements with respect to which the failure occurred. This includes contracting with the agent and providing the proper information sufficiently in advance of the due date of the return or statement to permit timely filing of correct returns or timely furnishing of correct payee statements; and
-
(ii) The agent satisfied the reasonable cause criteria set forth in paragraph (b) or one of the reasonable cause criteria set forth in paragraph (c) (2) through (6) of this section.
-
-
(6) Actions of the payee or any other person.
-
In order to establish reasonable cause under paragraph (c)(1) of this section due to the actions of the payee or any other person, such as a broker as defined in section 6045(c) providing information with respect to the return or payee statement, the filer must show either –
-
(i) That the failure resulted from the failure of the payee, or any other person required to provide information necessary for the filer to comply with the information reporting requirements (“any other person”), to provide information to the filer, or
-
(ii) That the failure resulted from incorrect information provided by the payee (or any other person) upon which information the filer relied in good faith. To substantiate reasonable cause under this paragraph (c)(6), the filer must provide documentary evidence upon request of the Internal Revenue Service showing that the failure was attributable to the payee (or any other person). See paragraph (d)(2) of this section for special rules relating to the availability of a waiver where the filer’s failure relates to a taxpayer identification number (TIN), and the failure is attributable to actions of the payee described in paragraph (c)(6) (i) or (ii) of this section.
-
-
IRM 20.1.1.3.2 Penalty Relief
IRM 20.1.1.3.2 (Internal Revenue Manual) provides some general insight into Reasonable Cause and the specific factors that may be considered.
-
-
-
Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise apply. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations.
-
In the interest of equitable treatment of the taxpayer and effective tax administration, the non-assertion or abatement of certain civil penalties based on reasonable cause or other relief provisions provided in this IRM must be made in a consistent manner and should conform with the considerations specified in the IRC, Treasury Regulations (Treas. Regs.), policy statements, and IRM Part 20.1, Penalty Handbook.
-
Reasonable cause relief is not available for all penalties; however, other exceptions may apply.
- For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.
- If a reasonable cause provision applies only to a specific IRC section, that reasonable cause provision will be discussed in the IRM 20.1 section relating to that specific IRC section. See IRM 20.1.1.1.2 and Exhibit 20.1.1-1, Penalty Relief Application Chart.
- When considering the information provided in the following subsections, remember that an acceptable explanation is not limited to those given in IRM 20.1. Penalty relief may be warranted based on an “other acceptable explanation,” provided the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply within the prescribed time. See IRM 20.1.1.3.2.2, Ordinary Business Care and Prudence.
-
The wording used to describe reasonable cause provisions varies. Some IRC penalty sections also require evidence that the taxpayer acted in good faith or that the taxpayer’s failure to comply with the law was not due to willful neglect. See specific IRM 20.1 sections for the rules that apply to a specific IRC penalty section. See IRM 20.1.1.1.2, Organization of IRM 20.1.
-
Taxpayers have reasonable cause when their conduct justifies the non-assertion or abatement of a penalty. Each case must be judged individually based on the facts and circumstances at hand. Consider the following in conjunction with specific criteria identified in the remainder of this subsection:
- What happened and when did it happen?
- During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
- How did the facts and circumstances result in the taxpayer not complying?
- How did the taxpayer handle the remainder of his or her affairs during this time?
- Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
-
Reasonable cause does not exist if, after the facts and circumstances that explain the taxpayer’s noncompliant behavior cease to exist, the taxpayer fails to comply with the tax obligation within a reasonable period of time.
-
-
Exhibit 4.26.16-1 FBAR Penalty Mitigation Guidelines
- The Bank Secrecy Act (BSA) allows the Secretary of the Treasury some discretion in determining the amount of penalties for violations of the FBAR reporting and record keeping requirements. There is a penalty ceiling but no minimum amount. This discretion has been delegated to the FBAR examiner.
- The examiner may determine that the facts and circumstances of a particular case do not justify a penalty.
- If there was an FBAR violation but no penalty is appropriate, the examiner must issue the FBAR warning letter, Letter 3800.
- When a penalty is appropriate, IRS established penalty mitigation guidelines to ensure the penalties determined by the examiner’s discretion are uniform. The examiner may determine that:
- A penalty under these guidelines is not appropriate, or
- A lesser amount than the guidelines otherwise provide is appropriate.
- The examiner must make this determination with the written approval of that examiner’s manager. The examiner’s workpapers must document the circumstances that make mitigation of the penalty under these guidelines appropriate. When determining the proper penalty amount, the examiner should keep in mind that manager approval is required to assert more than one $10,000 non-willful penalty per year, and in no event can the aggregate non-willful penalties asserted exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue. Similarly, manager approval is required to assert willful penalties that, in the aggregate, exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue, and in no event can the aggregate willful penalties exceed 100% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.
- To qualify for mitigation, the person must meet four criteria:
-
-
-
-
-
The person has no history of criminal tax or BSA convictions for the preceding 10 years and has no history of prior FBAR penalty assessments.
-
No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.
-
The person cooperated during the examination.
-
IRS did not determine a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account.
-
-
-
-
Reasonable Cause To Abate Penalties
While FBAR penalties can be tough , if a taxpayer can prove reasonable cause in support of their noncompliance, they may be able to reduce or abate FBAR penalties. there are several moving parts when it comes to presenting the IRS with a reasonable car statement package and taxpayers should be careful before making any proactive representation to the IRS.
Our FBAR Lawyers Represent Clients Worldwide
Our FBAR Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.