Reasonable Cause for Offshore Penalties FBAR & FATCA

Reasonable Cause for Offshore Penalties FBAR & FATCA

Reasonable Cause for Offshore Penalties FBAR & FATCA

Reasonable Cause for Offshore Penalties FBAR & FATCA:  The Reasonable Cause for Offshore Penalties FBAR & FATCA is an alternative to Streamlined and (new) OVDP. The Streamlined Procedure is a very effective method for U.S. persons to get into foreign accounts compliance with the IRS. This is especially true, since in recent years, the Internal Revenue Service has made the enforcement of offshore accounts, assets, investments and income a key priority.

IRS offshore penalties can be bad, and even non-willful penalties can far outweight the FBAR violation.

As with everything in life, it is easier to tor to avoid a penalty, than it is to try to abate it once the IRS has issued the penalty.

FBAR & FATCA Penalties

The Reasonable Cause for Offshore Penalties FBAR & FATCA analysis is complex. Reasonable Cause in the context of the IRS is when the taxpayer makes either a pre-penalty request for a penalty waiver or post-issuance abatement request for a penalty removal — depending on the timing of the request. Unlike the Streamlined Procedure and certification forms 14653 and 14654, there is no specific Reasonable Cause form. Rather, the client must rely on the tax attorney to draft a unique and effective reasonable cause request.

Pre-Penalty Reasonable Cause

The pre-penalty reasonable cause submission is the most effective. In the pre-penalty phase, the taxpayer is in the best position to try to avoid the penalty. This is because since the penalty has not been assessed yet, and you are dealing with more a lower-level personnel such as an IRS examiner. As a result, there is more wiggle room to try to sell your story to the IRS agent – and try to avoid the penalty altogether.

Penalty Abatement (Post-Penalty Reasonable Cause)

Penalty abatement occurs after the penalty has been issued, and the taxpayer is seeking to abate the penalty that has already been assessed. Once the offshore penalty has been issued, it is a bit more complicated. This is because the penalty is already on the books. Thus, it takes more effort for the underpaid and overworked agent to remove the penalty from the books then had he simply not assessed it in the first place.

Avoid Self-Representation & Non-Specialists

The recent case of U.S. v. Agrawal illustrates the risk and pitfalls of “Do-it-yourself” in the world of offshore penalties.

Reasonable Cause or Streamlined Procedure

Oftentimes, a filer may have the choice to submit either a reasonable cause or streamlined submission. Sometimes, the filer will not have much of an option — for example, if the taxpayer did not file timely tax returns (when required) in the prior years. 

As a side note, the reasonable cause vs. streamlined comparison generally refers to the streamlined domestic offshore procedures.

Why?

Because with Streamlined Foreign, there is no penalty.  

When it comes to analyzing the reasonable cause or streamlined submission, there are a few factors to consider. With reasonable cause, not only must the applicant be non-willful, but he or she must also meet the additional requirement of reasonable cause.

Here are some preliminary considerations:

  • Did the taxpayer submit timely original tax returns?
  • Did the taxpayer rely on a tax professional?
  • What is the total Title 26 Miscellaneous Offshore Penalty?
  • What is the downside if penalties are issued?
  • Is the Taxpayer’s general audit risk, low?

IRS Reasonable Cause IRM 20.1.1.3.2 (11-21-2017)

IRS Agents refer to the IRM or Internal Revenue Manual when assessing a Reasonable Cause submission.

What is Reasonable Cause?

As provided by the IRM:

        • 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 20.1.1.1.2and Exhibit 20.1.1-1Penalty 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 20.1.1.3.2.2Ordinary Business Care and Prudence.

DIIRSP is No Longer an Option

Prior to November 2020, taxpayers with no unreported income and only delinquent international reporting forms were almost always certain to avoid penalties by using DIIRSP (Delinquent International Information Return Submission Procedures).

Unfortunately, that program has ended — or rather “mutated” back into a reasonable cause submission. DFSP for delinquent FBAR submission still appears to be valid at least at the time of publication of this article.

Writing a Strong Reasonable Cause Statement

Reasonable cause statements are very complicated. If you are submitting to the IRS, you may consider hiring an experienced tax specialist to represent you — and while that will not guarantee success, it can help preserve your rights throughout the process.

Taxpayers should outline and assess the facts and circumstances in detail. Then, the Taxpayer should review and evaluate the code, regulations, and other supporting information and use all of the information to draft a specific, concise but persuasive statement. The letter should include both facts and law to effectively support his position that he acted reasonably.

Even if the Reasonable Cause statement is not successful at the outset, it sets up the taxpayer to fight the good fight at different levels of the IRS. With a good reasonable cause statement, the taxpayer will have a strong filing history record reflecting that they showed reasonable cause from the outset.

*If you or your Tax Representative prepared a reasonable cause letter and it amounts to about a half-page or so in total, then chances are it probably lacks the necessary facts and legal arguments sufficient to establish reasonable cause.

What Happens if an Initial Reasonable Cause Statement is Rejected?

This is no time to give up.

It’s not always as simple as writing a letter and that’s the end of it.  In addition, it is crucial to note that just submitting a protest/appeal (for example in response to a CP 15 notice) does not automatically stay the enforcement. If collections sent you a Notice of Lien or Levy (such as CP504) — you have an opportunity to file with the IRS Office of Appeals — so an early implemented strategy is crucial.

An Effective Reasonable Cause Package is Crucial

Reasonable Cause can be a great opportunity for taxpayers to minimize, avoid, or abate penalties. Depending on whether the penalties are reporting-related or tax-related will impact the avenues you have available for Reasonable Cause. In addition, Reasonable Cause statements will vary depending on what stage of the process you are in.

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