Protective Reasonable Cause Letter to Avoid IRS Penalties

Protective Reasonable Cause Letter to Avoid IRS Penalties

Protective Reasonable Cause Statement to Avoid IRS Penalties

Protective Reasonable Cause Letter to Avoid IRS Penalties: When it comes to International Information Reporting Forms and the IRS, there are many pitfalls for taxpayers to avoid. One of the most common situations we come across is when a taxpayer has missed the reporting of an international form, such as Form 3520 or 5471. If they had a CPA, sometimes the CPA gets nervous and wants to quickly shoot off a late form to the IRS without following proper procedures — oftentimes this results in unnecessary fines and penalties for the taxpayer. Let’s review the basics of a protective reasonable cause statement. 

 International Form Filing

International Tax Laws are specialty area of Tax practice. With offshore reporting, one of the biggest issues is not necessarily penalties associated with tax liability as much as it is penalties associated for non-compliance with reporting. For example, when a person receives a large gift from a foreign person, they oftentimes have a form 3520 filing requirement. If a person has an ownership or interest in a foreign corporation, then they may have a form 5471 filing requirement — there are several other forms to consider as well.

What is a Reasonable Cause Statement?

In order for the Internal Revenue Service to issue a penalty for noncompliance, the taxpayer has to miss the filing deadline and not be able to show Reasonable Cause. This is why it is so important that when a late form is filed, that the Taxpayer submits a detailed and thorough reasonable cause statement — along with the late filed information return. Oftentimes, when a detailed and effective reasonable cause statement is submitted along with the late filing, it will prevent the IRS from issuing a penalty. Likewise, if there is no letter accompanying the late filing — there is a higher likelihood of being penalized.

IRS Automatic Assessed Penalties

The offshore penalty issue is amplified when it involves many international reporting forms. The reason why is because the IRS oftentimes issues what is referred to as automatic assessed penalties with the late filing. For example, when a person has a late filed form 3520 or 5471 and the IRS receives it after the due date, once it is processed by the service, it will spit out an automatic penalty letter. Many times, this penalty can be prevented by submitting a reasonable cause statement along with the late filing. While a reasonable cost statement does not guarantee against the penalty — it does set the taxpayer up for the long haul in order to dispute the penalty later ib the process and/oe show that the taxpayer has shown reasonable cause every step of the way.

Penalty Notice & CP15

Oftentimes, a penalty notice will be issued on a CP15 Notice. It is important that the taxpayer timely responds to the CP15 notice in order to preserve their rights. There are two main options available:
  • Taxpayer can pay the penalty and then request an abatement.  If this does not work, then they can sue the IRS for refund in federal court.
  • Taxpayer can appeal the penalty by submitting a statement to the Office of Appeals. If the Taxpayer is not successful, then the Taxpayer can decide later whether they want to pay, request abatement and/or if unsuccessful sue for refund in federal court or continue to dispute the penalty until it reaches the collection due process hearing stage (CDP)*
*There are pros and cons to waiting until the end-stage to pursue a CDP request, and something a taxpayer should discuss in detail with their Tax Attorney.

Increased Enforcement of Offshore Penalty 

In conclusion, when a US taxpayer has foreign accounts, assets, investments, gifts, and or income, they may have several IRS reporting requirements to contend with. If the taxpayer missed the reporting requirements, then it is important for the Taxpayer to put together a strategy before making a proactive representation to the IRS. Just shooting off a late international reporting form without a reasonable cause statement is generally ineffective for avoiding penalties.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. Contact our firm today for assistance.

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