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. The IRS offshore penalties can be bad, and even non-willful penalties can be staggering, if the agent was to issue the $10,000 per occurrence penalty for FBAR violations. As with everything in life, it is easier to avoid a penalty, than it is to try to abate it once the IRS has issued the penalty.
Reasonable cause may be used to abate or avoid penalties.
Reasonable Cause for Offshore Penalties FBAR & FATCA
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.
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 220.127.116.11.2 (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 18.104.22.168.2and 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 22.214.171.124.2.2, Ordinary Business Care and Prudence.
We Specialize in Streamlined & Offshore Voluntary Disclosure
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Our lead attorney is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
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No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
We specialize in FBAR and FATCA. Contact our firm today for assistance with getting compliant.